##### 



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 June 30, 2006
 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 June 30, 2006 and
December 31, 2005
    
    
    4Unaudited Consolidated Statements of Operations for the three months ended
June 30, 2006 and 2005
    
    
    5Unaudited Consolidated Statements of Operations for the six months ended
June 30, 2006 and 2005
    
    
    6Unaudited Consolidated Statement of Shareholders Equity for the six months ended
June 30, 2006
    
    
    7Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 2006 and 2005
    
    
    8Notes to Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    46PART II. OTHER INFORMATIONItem 4. Submissions of Matters to a Vote of Security Holders
    
    
    46Item 6. Exhibits
    
    
    47SIGNATURES
    
    
    48EXHIBIT INDEX
    
    
    49
 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 may not sell,
 
    
    franchise licenses may 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, zoning restrictions and non-issuance
or delay of issuance of governmental permits,
 
    
    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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##### 



Item 1. Financial Statements
 WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS  (in thousands)
 As of
    
    As ofJune 30, 2006
    
    
    December 31, 2005ASSETSLand
    
    $
    55,957
    
    
    $
    55,758Buildings and improvements
    
    
    410,379
    
    
    
    422,081Furniture and equipment
    
    
    62,853
    
    
    
    63,048Operating properties
    
    
    529,189
    
    
    
    540,887Less accumulated depreciation
    
    
    134,059
    
    
    
    139,259395,130
    
    
    
    401,628Properties under development
    
    
    20,851
    
    
    
    25,139Net investment in hotel properties
    
    
    415,981
    
    
    
    426,767Assets held for sale
    
    
    18,967
    
    
    
    11,009Corporate furniture fixtures and equipment, net
    
    
    607
    
    
    
    371Cash
    
    
    11,268
    
    
    
    15,047Restricted marketable securities
    
    
    63,540
    
    
    
    Accounts receivable, net
    
    
    3,602
    
    
    
    3,820Notes receivable
    
    
    59,709
    
    
    
    38,050Investment in joint ventures
    
    
    2,434
    
    
    
    1,795Deferred expenses, net
    
    
    9,833
    
    
    
    6,807Prepaid expenses and other assets
    
    
    10,920
    
    
    
    12,556Deferred tax asset
    
    
    10,879
    
    
    
    11,471Total assets
    
    $
    607,740
    
    
    $
    527,693LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITYLines of credit
    
    $
    66,796
    
    
    $
    157,896Due to trust that holds marketable securities
    
    
    63,540
    
    
    
    Mortgage loans
    
    
    214,087
    
    
    
    99,874Accounts payable and accrued expenses
    
    
    19,921
    
    
    
    27,915Distributions payable
    
    
    6,055
    
    
    
    6,011Total liabilities
    
    
    370,399
    
    
    
    291,696Minority interest
    
    
    12,838
    
    
    
    12,786Shareholders 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,
26,801 shares issued and 26,490 shares outstanding
at June 30, 2006 and 26,509 shares issued
and outstanding at December 31, 2005
    
    
    265
    
    
    
    265Additional paid-in capital
    
    
    324,951
    
    
    
    325,238Unearned compensation
    
    
    
    
    
    
    (1,454
    )Distributions in excess of earnings
    
    
    (100,750
    )
    
    
    (100,875
    )Total shareholders equity
    
    
    224,503
    
    
    
    223,211Total liabilities, minority interest and shareholders equity
    
    $
    607,740
    
    
    $
    527,693
  4




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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share amounts)
 Three Months Ended June 30,2006
    
    2005Operating revenue:Rooms
    
    $
    42,326
    
    
    $
    32,120Food and beverage
    
    
    3,459
    
    
    
    2,251Other operating departments
    
    
    1,455
    
    
    
    1,017Joint venture fee income
    
    
    51
    
    
    
    63Total operating revenue
    
    
    47,291
    
    
    
    35,451Hotel operating expenses:Rooms
    
    
    8,639
    
    
    
    6,915Food and beverage
    
    
    2,431
    
    
    
    1,678Other operating departments
    
    
    971
    
    
    
    629Undistributed operating expenses:Property operating expenses
    
    
    8,553
    
    
    
    6,502Real estate taxes and property and casualty insurance
    
    
    2,008
    
    
    
    1,687Franchise costs
    
    
    2,937
    
    
    
    2,318Maintenance and repair
    
    
    2,142
    
    
    
    1,713Management fees
    
    
    1,663
    
    
    
    1,116General and administrative
    
    
    2,498
    
    
    
    1,901Depreciation
    
    
    5,306
    
    
    
    3,944Amortization
    
    
    516
    
    
    
    387Total operating expenses
    
    
    37,664
    
    
    
    28,790Operating income
    
    
    9,627
    
    
    
    6,661Extinguishment of debt
    
    
    (3,961
    )
    
    
    Interest and other income
    
    
    2,020
    
    
    
    1,227Interest expense
    
    
    (4,938
    )
    
    
    (2,423
    )Income 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
    
    
    2,748
    
    
    
    5,465(Income) loss allocation to minority interest in Partnership
    
    
    16
    
    
    
    (153
    )Income allocation to minority interest in consolidated joint ventures
    
    
    (353
    )
    
    
    (139
    )Income tax expense
    
    
    (965
    )
    
    
    (267
    )Equity in income of unconsolidated joint ventures
    
    
    42
    
    
    
    29Income from continuing operations
    
    
    1,488
    
    
    
    4,935Discontinued operations:Income from discontinued operations
    
    
    599
    
    
    
    392Gain on sale of discontinued operations
    
    
    3,479
    
    
    
    449Net income
    
    
    5,566
    
    
    
    5,776Preferred stock distribution
    
    
    (1,840
    )
    
    
    (1,840
    )Net income available to common shareholders
    
    $
    3,726
    
    
    $
    3,936Basic weighted average number of common shares outstanding
    
    
    26,479
    
    
    
    26,298Diluted weighted average number of common shares outstanding
    
    
    26,479
    
    
    
    27,611Income (loss) per common share basic and diluted:Income (loss) from continuing operations
    
    $
    (0.01
    )
    
    $
    0.12Income from discontinued operations
    
    
    0.15
    
    
    
    0.03Net income available to common shareholders
    
    $
    0.14
    
    
    $
    0.15Per share dividends to common shareholders
    
    $
    0.15
    
    
    $
    0.15
  5




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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share amounts)
 Six Months Ended June 30,2006
    
    2005Operating revenue:Rooms
    
    $
    77,972
    
    
    $
    60,104Food and beverage
    
    
    6,012
    
    
    
    4,072Other operating departments
    
    
    2,543
    
    
    
    1,695Joint venture fee income
    
    
    103
    
    
    
    124Total operating revenue
    
    
    86,630
    
    
    
    65,995Hotel operating expenses:Rooms
    
    
    16,232
    
    
    
    13,051Food and beverage
    
    
    4,529
    
    
    
    3,175Other operating departments
    
    
    1,802
    
    
    
    1,234Undistributed operating expenses:Property operating expenses
    
    
    16,848
    
    
    
    12,695Real estate taxes and property and casualty insurance
    
    
    3,823
    
    
    
    3,291Franchise costs
    
    
    5,368
    
    
    
    4,331Maintenance and repair
    
    
    4,200
    
    
    
    3,382Management fees
    
    
    3,039
    
    
    
    1,804General and administrative
    
    
    5,526
    
    
    
    3,890Depreciation
    
    
    10,297
    
    
    
    7,860Amortization
    
    
    1,007
    
    
    
    635Total operating expenses
    
    
    72,671
    
    
    
    55,348Operating income
    
    
    13,959
    
    
    
    10,647Extinguishment of debt
    
    
    (3,961
    )
    
    
    Interest and other income
    
    
    3,406
    
    
    
    2,747Interest expense
    
    
    (9,350
    )
    
    
    (4,830
    )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
    
    
    4,054
    
    
    
    8,564(Income) loss allocation to minority interest in Partnership
    
    
    31
    
    
    
    (208
    )Income allocation to minority interest in consolidated joint ventures
    
    
    (219
    )
    
    
    (267
    )Income tax expense
    
    
    (914
    )
    
    
    (176
    )Equity in income (loss) of unconsolidated joint ventures
    
    
    64
    
    
    
    (33
    )Income from continuing operations
    
    
    3,016
    
    
    
    7,880Discontinued operations:Income from discontinued operations
    
    
    1,102
    
    
    
    510Gain on sale of discontinued operations
    
    
    7,728
    
    
    
    364Net income
    
    
    11,846
    
    
    
    8,754Preferred stock distribution
    
    
    (3,680
    )
    
    
    (3,680
    )Net income available to common shareholders
    
    $
    8,166
    
    
    $
    5,074Basic weighted average number of common shares outstanding
    
    
    26,449
    
    
    
    26,290Diluted weighted average number of common shares outstanding
    
    
    26,449
    
    
    
    27,607Income (loss) per common share basic and diluted:Income (loss) from continuing operations
    
    $
    (0.03
    )
    
    $
    0.16Income from discontinued operations
    
    
    0.34
    
    
    
    0.03Net income available to common shareholders
    
    $
    0.31
    
    
    $
    0.19Per share dividends to common shareholders
    
    $
    0.30
    
    
    $
    0.30
  6




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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006  (in thousands, except per share amounts)
 Additional
    
    
    
    
    
    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, 2005
    
    
    3,680
    
    
    $
    37
    
    
    
    26,509
    
    
    $
    265
    
    
    $
    325,238
    
    
    $
    (1,454
    )
    
    $
    (100,875
    )
    
    $
    
    
    
    $
    223,211Presentation reclassification  SFAS 123R adoption
    
    
    
    
    
    
    
    
    
    
    (136
    )
    
    
    (1
    )
    
    
    (1,453
    )
    
    
    1,454
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock expense recognition
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    1
    
    
    
    1,166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,167Distributions ($0.30 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,041
    )
    
    
    
    
    
    
    (8,041
    )Distributions ($1.00 per preferred B share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,680
    )
    
    
    
    
    
    
    (3,680
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,846
    
    
    
    
    
    
    
    11,846Balances at June 30, 2006
    
    
    3,680
    
    
    $
    37
    
    
    
    26,490
    
    
    $
    265
    
    
    $
    324,951
    
    
    $
    
    
    
    $
    (100,750
    )
    
    $
    
    
    
    $
    224,503
  7




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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  ($ in thousands)
 Six Months Ended June 30,2006
    
    2005Cash flows from operating activities:Net income
    
    $
    11,846
    
    
    $
    8,754Adjustments to reconcile net income to net cash
provided by operating activities:Income allocation to minority interest
    
    
    395
    
    
    
    249Income allocation to consolidated joint ventures
    
    
    219
    
    
    
    267Depreciation
    
    
    10,955
    
    
    
    9,472Amortization
    
    
    1,135
    
    
    
    652Extinguishment of debt
    
    
    3,961
    
    
    
    Income tax expense
    
    
    762
    
    
    
    152Net gain on sale of hotel properties
    
    
    (8,103
    )
    
    
    (381
    )Equity in (income) loss of unconsolidated joint ventures
    
    
    (64
    )
    
    
    33Distributions from joint ventures
    
    
    50
    
    
    
    59Unearned compensation amortization
    
    
    1,155
    
    
    
    595Changes in assets and liabilities:Accounts receivable
    
    
    218
    
    
    
    (477
    )Prepaid expenses and other assets
    
    
    1,636
    
    
    
    (246
    )Accounts payable and accrued expenses
    
    
    (820
    )
    
    
    1,569Net cash provided by operating activities
    
    
    23,345
    
    
    
    20,698Cash flows from investing activities:Investment in hotel properties
    
    
    (23,995
    )
    
    
    (14,356
    )Proceeds from sale of hotel properties
    
    
    23,282
    
    
    
    10,087Issuance of notes receivable
    
    
    (21,685
    )
    
    
    (5,700
    )Collection of notes receivable
    
    
    26
    
    
    
    6,069Investment in unconsolidated joint ventures
    
    
    (7,516
    )
    
    
    Purchase of restricted marketable securities
    
    
    (64,578
    )
    
    
    Franchise and note receivable fees
    
    
    (473
    )
    
    
    Net cash used in investing activities
    
    
    (94,939
    )
    
    
    (3,900
    )Cash flows from financing activities:Net increase (decrease) in lines of credit
    
    
    (91,100
    )
    
    
    1,050Proceeds from mortgage loans
    
    
    187,775
    
    
    
    940Payment of mortgage loans
    
    
    (12,317
    )
    
    
    (975
    )Distributions to shareholders
    
    
    (11,677
    )
    
    
    (11,617
    )Distributions to minority interest in partnership
    
    
    (390
    )
    
    
    (389
    )Distributions to minority interest in consolidated
joint ventures, net of contributions
    
    
    (160
    )
    
    
    (360
    )Fees paid in connection with financing activities
    
    
    (4,316
    )
    
    
    (2,824
    )Net cash provided by (used in) financing activities
    
    
    67,815
    
    
    
    (14,175
    )Net increase (decrease) in cash
    
    
    (3,779
    )
    
    
    2,623Cash at beginning of period
    
    
    15,047
    
    
    
    4,115Cash at end of period
    
    $
    11,268
    
    
    $
    6,738Supplemental disclosure:Cash paid for interest (net of amounts capitalized)
    
    $
    10,304
    
    
    $
    4,402Summary of non-cash investing and financing activities (See Note 12):Distributions to shareholders declared but not paid
    
    $
    12,111
    
    
    $
    12,023Distributions to minority interest declared but not paid
    
    $
    390
    
    
    $
    389Issuance of stock grants
    
    $
    
    
    
    $
    1,249Adjustment to minority interest due to
issuance of common stock
    
    $
    12
    
    
    $
    54Sale of hotel property for note receivable
    
    $
    
    
    
    $
    1,425
  8




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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 1. ORGANIZATION
      9




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##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
 Basis of Presentation
  Principles of Consolidation
  Accounting for Long-Lived Assets
 Investment in Hotel Properties.
 General.
 10




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##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Asbestos and Other.
 Franchise Agreements
  Year of Expiration
    
    Number of Hotels2007
    
    
    12008
    
    
    22009
    
    
    32010
    
    
    12011
    
    
    22012
    
    
    22013
    
    
    62014
    
    
    12015
    
    
    12016
    
    
    22017


    102018


    52019


    62020


    12022


    32023


    12024


    32025


    12026


    1
   Recently Issued Accounting Standards
  11




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##### 



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




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##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  5. DISCONTINUED OPERATIONS
     Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Total revenue
    
    $
    3,918
    
    
    $
    5,356
    
    
    $
    8,569
    
    
    $
    10,272Total expenses
    
    
    3,312
    
    
    
    4,858
    
    
    
    7,568
    
    
    
    9,761Income from hotel operations
    
    
    606
    
    
    
    498
    
    
    
    1,001
    
    
    
    511Allocation to minority interest in Partnership  income
from discontinued operations
    
    
    (27
    )
    
    
    (18
    )
    
    
    (51
    )
    
    
    (24
    )Gain on sale of discontinued operations
    
    
    3,648
    
    
    
    471
    
    
    
    8,103
    
    
    
    381Allocation to minority interest in Partnership 
gain on sale of discontinued operations
    
    
    (169
    )
    
    
    (22
    )
    
    
    (375
    )
    
    
    (17
    )Income tax (expense) benefit
    
    
    20
    
    
    
    (88
    )
    
    
    152
    
    
    
    23Income from discontinued operations
    
    $
    4,078
    
    
    $
    841
    
    
    $
    8,830
    
    
    $
    874
 13




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##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 6. SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES
  Consolidated Joint Ventures
 Hotel
Under Development
  Operating Hotels
    14




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##### 



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




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##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  June 30,
    
    
    December 31,2006
    
    
    2005Gateway Hotel Associates, LLCAssets
    
    $
    6,157
    
    
    $
    2,336Liabilities
    
    
    2,074
    
    
    
    36Equity
    
    $
    4,083
    
    
    $
    2,300Winston Kansas City, LPAssets
    
    $
    25,707
    
    
    $
    16,984Liabilities
    
    
    14,520
    
    
    
    1,887Equity
    
    $
    11,187
    
    
    $
    15,097Stanley AssociatesAssets
    
    $
    18,119
    
    
    $
    18,192Liabilities
    
    
    12,885
    
    
    
    13,059Equity
    
    $
    5,234
    
    
    $
    5,133Stanley LesseeAssets
    
    $
    496
    
    
    $
    789Liabilities
    
    
    816
    
    
    
    650Equity (deficit)
    
    $
    (320
    )
    
    $
    139131 East Redwood, LLCAssets
    
    $
    1,653
    
    
    $
    1,372Liabilities
    
    
    662
    
    
    
    428Equity
    
    $
    991
    
    
    $
    944Marsh Landing Hotel AssociatesAssets
    
    $
    6,778
    
    
    $
    6,532Liabilities
    
    
    4,828
    
    
    
    4,782Equity
    
    $
    1,950
    
    
    $
    1,750Marsh Landing LesseeAssets
    
    $
    267
    
    
    $
    48Liabilities
    
    
    199
    
    
    
    43Equity
    
    $
    68
    
    
    $
    5Chapel Hill Hotel AssociatesAssets
    
    $
    13,238
    
    
    $
    13,431Liabilities
    
    
    10,465
    
    
    
    10,712Equity
    
    $
    2,773
    
    
    $
    2,719Chapel Hill LesseeAssets
    
    $
    495
    
    
    $
    151Liabilities
    
    
    245
    
    
    
    68Equity
    
    $
    250
    
    
    $
    83
 16




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gateway Hotel
Associates, LLCRevenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expense
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    Net loss
    
    $
    (7
    )
    
    $
    
    
    
    $
    (7
    )
    
    $
    Winston Kansas
City, LPRevenue
    
    $
    297
    
    
    $
    
    
    
    $
    297
    
    
    $
    Expense
    
    
    581
    
    
    
    
    
    
    
    621
    
    
    
    Net loss
    
    $
    (284
    )
    
    $
    
    
    
    $
    (324
    )
    
    $
    Stanley AssociatesRevenue
    
    $
    528
    
    
    $
    
    
    
    $
    923
    
    
    $
    Expense
    
    
    408
    
    
    
    
    
    
    
    821
    
    
    
    Net income
    
    $
    120
    
    
    $
    
    
    
    $
    102
    
    
    $
    Stanley LesseeRevenue
    
    $
    2,375
    
    
    $
    
    
    
    $
    3,261
    
    
    $
    Expense
    
    
    2,228
    
    
    
    
    
    
    
    3,719
    
    
    
    Net income (loss)
    
    $
    147
    
    
    $
    
    
    
    $
    (458
    )
    
    $
    131 East Redwood,
LLCRevenue
    
    $
    1,561
    
    
    $
    
    
    
    $
    2,629
    
    
    $
    Expense
    
    
    1,378
    
    
    
    
    
    
    
    2,581
    
    
    
    Net income
    
    $
    183
    
    
    $
    
    
    
    $
    48
    
    
    $
    Marsh Landing Hotel
AssociatesRevenue
    
    $
    384
    
    
    $
    340
    
    
    $
    741
    
    
    $
    713Expense
    
    
    210
    
    
    
    222
    
    
    
    411
    
    
    
    431Net income
    
    $
    174
    
    
    $
    118
    
    
    $
    330
    
    
    $
    282Marsh Landing LesseeRevenue
    
    $
    937
    
    
    $
    812
    
    
    $
    1,793
    
    
    $
    1,696Expense
    
    
    897
    
    
    
    799
    
    
    
    1,729
    
    
    
    1,609Net income
    
    $
    40
    
    
    $
    13
    
    
    $
    64
    
    
    $
    87Chapel Hill Hotel
AssociatesRevenue
    
    $
    618
    
    
    $
    550
    
    
    $
    1,126
    
    
    $
    977Expense
    
    
    494
    
    
    
    488
    
    
    
    974
    
    
    
    909Net income
    
    $
    124
    
    
    $
    62
    
    
    $
    152
    
    
    $
    68Chapel Hill LesseeRevenue
    
    $
    1,485
    
    
    $
    1,311
    
    
    $
    2,682
    
    
    $
    2,303Expense
    
    
    1,335
    
    
    
    1,231
    
    
    
    2,514
    
    
    
    2,216Net income
    
    $
    150
    
    
    $
    80
    
    
    $
    168
    
    
    $
    87
  17




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Unconsolidated Joint Ventures
 Hotel Under Development
  Operating
Hotels
     18




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 June 30,
    
    December 31,2006
    
    2005Gross fixed assets
    
    $
    41,335
    
    
    $
    40,791Accumulated depreciation
    
    
    (3,897
    )
    
    
    (2,912
    )Other assets
    
    
    4,143
    
    
    
    4,304Total assets
    
    
    41,581
    
    
    
    42,183Liabilities
    
    
    4,831
    
    
    
    4,053Outstanding loans
    
    
    25,745
    
    
    
    25,954Total liabilities
    
    
    30,576
    
    
    
    30,007Equity
    
    
    11,005
    
    
    
    12,176Companys share of equity
    
    
    1,661
    
    
    
    1,644Companys additional basis
    
    
    148
    
    
    
    151Investment in joint ventures
    
    $
    1,809
    
    
    $
    1,795
 Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    4,270
    
    
    $
    4,187
    
    
    $
    8,117
    
    
    $
    7,272Hotel department expenses
    
    
    (2,305
    )
    
    
    (2,429
    )
    
    
    (4,415
    )
    
    
    (4,468
    )Management fees
    
    
    (142
    )
    
    
    (200
    )
    
    
    (286
    )
    
    
    (342
    )Undistributed and fixed expenses
    
    
    (1,425
    )
    
    
    (1,237
    )
    
    
    (2,776
    )
    
    
    (2,503
    )Hotel net income (loss)
    
    
    398
    
    
    
    321
    
    
    
    640
    
    
    
    (41
    )Charlesbank Ventures 87% share of net income (loss)
    
    
    346
    
    
    
    279
    
    
    
    557
    
    
    
    (36
    )Corporate charges
    
    
    (56
    )
    
    
    (61
    )
    
    
    (108
    )
    
    
    (136
    )Charlesbank Venture net income (loss)
    
    
    290
    
    
    
    218
    
    
    
    449
    
    
    
    (172
    )Winstons 15% share of Charlesbank
Venture net income (loss)
    
    
    43
    
    
    
    33
    
    
    
    67
    
    
    
    (26
    )Amortization of investment true-up
    
    
    (1
    )
    
    
    (4
    )
    
    
    (3
    )
    
    
    (7
    )Equity in income (loss) of
unconsolidated joint ventures
    
    $
    42
    
    
    $
    29
    
    
    $
    64
    
    
    $
    (33
    )
 7. NOTES RECEIVABLE
  19




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 June 30,
    
    December 31,Notes receivable as of
    
    2006
    
    2005$1.1 million mezzanine loan collateralized
by the ownership interest in the entity
that owns the Hilton Garden Inn in Atlanta
(Sugarloaf) GA; matures 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
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 of the hotel
    
    $
    1,080
    
    
    $
    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$5.5 million mezzanine loan collateralized
by the ownership interest in the entity
that owns the Residence Inn by Marriott in
St. Louis, MO; matures October 2009;
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 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 (See Note 5)
    
    
    1,336
    
    
    
    1,366$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
based on a six and one-half year
amortization schedule
    
    
    2,333
    
    
    
    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; interest rate of 11%,
with interest only payments until maturity
    
    
    2,000
    
    
    
    2,000$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
    
    
    14,000
    
    
    
    14,000$2.3 million B-note, of a $12 million
total loan amount for a to-be-built
140-room Hilton Garden Inn in Columbia,
SC; collateralized by a second mortgage on
the hotel project; interest rate of 90-day
LIBOR plus 6.1%; to be funded ratably over
the projected construction period
    
    
    1,377
    
    
    
    
 20




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 June 30,
    
    December 31,Notes receivable as of
    
    2006
    
    2005$1.7 million B note for a 122-room
Hilton Garden Inn under construction in
Tuscaloosa, TN; collateralized by a second
mortgage on the hotel project, interest
rate of 90-day LIBOR plus 7.63%; to be
funded ratably over the projected
construction period; thereafter, the
spread over 90-day LIBOR reduces to 7.43%
, in addition, the B note accrues
interest of 3.29% per annum until
maturity, which is five years from the
date the property opens to the general
public
    
    
    
    
    
    
    $8.5 million five year first mortgage for
a 101-room Hampton Inn & Suites under
construction in Murfreesboro, TN; interest
rate of 30-day LIBOR plus 3.60%, with
another 1.0 % of the original principal
balance accruing until the loan is paid in
full; 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
    
    
    
    
    
    
    $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
    
    
    20,308
    
    
    
    Total notes receivable
    
    $
    59,709
    
    
    $
    38,050Total interest receivable related to notes
    
    $
    1,404
    
    
    $
    1,116
  8. INCOME TAXES
  9. EARNINGS PER SHARE
   21




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Income from continuing operations
    
    $
    1,488
    
    
    $
    4,935
    
    
    $
    3,016
    
    
    $
    7,880Less: preferred stock distributions
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (3,680
    )
    
    
    (3,680
    )Income (loss) from continuing operations
available to common shareholders
    
    $
    (352
    )
    
    $
    3,095
    
    
    $
    (664
    )
    
    $
    4,200Income from discontinued operations
    
    $
    4,078
    
    
    $
    841
    
    
    $
    8,830
    
    
    $
    874Net income available to common shareholders
    
    
    3,726
    
    
    
    3,936
    
    
    
    8,166
    
    
    
    5,074Plus: income from continuing operations
allocated to minority interest
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    208Plus: income from discontinued operations
allocated to minority interest
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    41Net income available to common shareholders assuming dilution
    
    $
    3,726
    
    
    $
    4,129
    
    
    $
    8,166
    
    
    $
    5,323Weighted average number of common shares basic
    
    
    26,479
    
    
    
    26,298
    
    
    
    26,449
    
    
    
    26,290Minority interest units with redemption rights
    
    
    
    
    
    
    1,299
    
    
    
    
    
    
    
    1,299Stock options and unvested stock grants
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    18Weighted average number of common shares assuming dilution
    
    
    26,479
    
    
    
    27,611
    
    
    
    26,449
    
    
    
    27,607Earnings per share  basic and dilutedIncome (loss) from continuing operations
available to common shareholders
    
    $
    (0.01
    )
    
    $
    0.12
    
    
    $
    (0.03
    )
    
    $
    0.16Income from discontinued operations
    
    
    0.15
    
    
    
    0.03
    
    
    
    0.34
    
    
    
    0.03Net income available to common shareholders
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.31
    
    
    $
    0.19
  10. STOCK INCENTIVE PLAN
   22




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Options
  Exercise Price
    
    Options Outstanding
    
    Options Exercisable
    
    Remaining Contractual Life$
    9.38
    
    
    10,000
    
    
    10,000
    
    
    Expire on May 18, 2009
  Weighted AverageShares
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    100,000
    
    
    $
    11.18Forfeited
    
    
    (90,000
    )
    
    $
    11.38Outstanding at June 30, 2006
    
    
    10,000
    
    
    $
    9.38Options exercisable at June 30, 2006
    
    
    10,000
 Share Awards
  Number of
    
    Weighted AverageShares
    
    Grant-Date Fair Value(in thousands)
    
    Per Share
    
    Fair ValueNon-vested at December 31, 2005
    
    
    136
    
    
    $
    10.69
    
    
    $
    1,454Granted
    
    
    292
    
    
    $
    9.73
    
    
    $
    2,840Vested
    
    
    (117
    )
    
    $
    9.88
    
    
    $
    (1,156
    )Forfeited
    
    
    
    
    
    $
    
    
    
    $
    Non-vested at June 30, 2006
    
    
    311
    
    
    $
    10.09
    
    
    $
    3,138
  23




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  11. SEGMENT REPORTING
   Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    47,291
    
    
    $
    
    
    
    $
    
    
    
    $
    47,291Operating expenses
    
    
    (29,344
    )
    
    
    (1
    )
    
    
    (2,497
    )
    
    
    (31,842
    )Depreciation and amortization
    
    
    (5,822
    )
    
    
    
    
    
    
    
    
    
    
    (5,822
    )Extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (3,961
    )
    
    
    (3,961
    )Interest and other income
    
    
    
    
    
    
    1,825
    
    
    
    195
    
    
    
    2,020Interest expense
    
    
    (3,933
    )
    
    
    (1,005
    )
    
    
    
    
    
    
    (4,938
    )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
    
    
    8,192
    
    
    
    819
    
    
    
    (6,263
    )
    
    
    2,748Loss allocation to minority interest in
Partnership
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    16Income allocation to minority interest in consolidated
joint ventures
    
    
    (353
    )
    
    
    
    
    
    
    
    
    
    
    (353
    )Income tax expense
    
    
    (965
    )
    
    
    
    
    
    
    
    
    
    
    (965
    )Equity in income of unconsolidated joint
ventures
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Income (loss) from
continuing
operations
    
    $
    6,916
    
    
    $
    819
    
    
    $
    (6,247
    )
    
    $
    1,488Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,078Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,566Total assets
    
    $
    546,627
    
    
    $
    61,113
    
    
    $
    
    
    
    $
    607,740
 24




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    35,451
    
    
    $
    
    
    
    $
    
    
    
    $
    35,451Operating expenses
    
    
    (22,558
    )
    
    
    (10
    )
    
    
    (1,891
    )
    
    
    (24,459
    )Depreciation and amortization
    
    
    (4,331
    )
    
    
    
    
    
    
    
    
    
    
    (4,331
    )Interest and other income
    
    
    
    
    
    
    1,151
    
    
    
    76
    
    
    
    1,227Interest expense
    
    
    (2,021
    )
    
    
    (402
    )
    
    
    
    
    
    
    (2,423
    )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
    
    
    6,541
    
    
    
    739
    
    
    
    (1,815
    )
    
    
    5,465Income allocation to minority interest in
Partnership
    
    
    
    
    
    
    
    
    
    
    (153
    )
    
    
    (153
    )Income allocation to minority interest in
consolidated joint ventures
    
    
    (139
    )
    
    
    
    
    
    
    
    
    
    
    (139
    )Income tax expense
    
    
    (267
    )
    
    
    
    
    
    
    
    
    
    
    (267
    )Equity in income of unconsolidated joint
ventures
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    29Income (loss) from
continuing
operations
    
    $
    6,164
    
    
    $
    739
    
    
    $
    (1,968
    )
    
    $
    4,935Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    841Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,776Total assets
    
    $
    391,131
    
    
    $
    33,332
    
    
    $
    
    
    
    $
    424,463
  Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    86,630
    
    
    $
    
    
    
    $
    
    
    
    $
    86,630Operating expenses
    
    
    (55,841
    )
    
    
    (1
    )
    
    
    (5,525
    )
    
    
    (61,367
    )Depreciation and amortization
    
    
    (11,304
    )
    
    
    
    
    
    
    
    
    
    
    (11,304
    )Extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (3,961
    )
    
    
    (3,961
    )Interest and other income
    
    
    
    
    
    
    3,068
    
    
    
    338
    
    
    
    3,406Interest expense
    
    
    (7,724
    )
    
    
    (1,626
    )
    
    
    
    
    
    
    (9,350
    )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
    
    
    11,761
    
    
    
    1,441
    
    
    
    (9,148
    )
    
    
    4,054Loss allocation to minority interest in
Partnership
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    31Income allocation to minority interest in
consolidated joint ventures
    
    
    (219
    )
    
    
    
    
    
    
    
    
    
    
    (219
    )Income tax expense
    
    
    (914
    )
    
    
    
    
    
    
    
    
    
    
    (914
    )Equity in income of unconsolidated joint
ventures
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Income (loss) from
continuing
operations
    
    $
    10,692
    
    
    $
    1,441
    
    
    $
    (9,117
    )
    
    $
    3,016Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,830Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,846Total assets
    
    $
    546,627
    
    
    $
    61,113
    
    
    $
    
    
    
    $
    607,740
 25




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    65,995
    
    
    $
    
    
    
    $
    
    
    
    $
    65,995Operating expenses
    
    
    (42,963
    )
    
    
    (11
    )
    
    
    (3,879
    )
    
    
    (46,853
    )Depreciation and amortization
    
    
    (8,495
    )
    
    
    
    
    
    
    
    
    
    
    (8,495
    )Interest and other income
    
    
    
    
    
    
    2,614
    
    
    
    133
    
    
    
    2,747Interest expense
    
    
    (4,011
    )
    
    
    (819
    )
    
    
    
    
    
    
    (4,830
    )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
    
    
    10,526
    
    
    
    1,784
    
    
    
    (3,746
    )
    
    
    8,564Income allocation to minority interest in
Partnership
    
    
    
    
    
    
    
    
    
    
    (208
    )
    
    
    (208
    )Income allocation to minority interest in
consolidated joint ventures
    
    
    (267
    )
    
    
    
    
    
    
    
    
    
    
    (267
    )Income tax expense
    
    
    (176
    )
    
    
    
    
    
    
    
    
    
    
    (176
    )Equity in income of unconsolidated joint
ventures
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    (33
    )Income (loss) from
continuing
operations
    
    $
    10,050
    
    
    $
    1,784
    
    
    $
    (3,954
    )
    
    $
    7,880Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    874Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,754Total assets
    
    $
    391,131
    
    
    $
    33,332
    
    
    $
    
    
    
    $
    424,463
 12. CREDIT FACILITIES AND MORTGAGE DEBT
 Credit Facilities
  Mortgage Loans
   26




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  June 30,
    
    December 31,2006
    
    2005Ten-year loan with GECC
collateralized by 14 hotels,
matures December 1, 2008, with a
25-year amortization period, at a
fixed interest rate of 7.375%,
with interest and principal
payments, defeased May 2006 (see
above)
    
    $
    
    
    
    $
    61,957Sixteen ten-year CMBS loans
collateralized by 16 hotels, at a
fixed interest rate of 5.94%,
interest only for four years and
thereafter require total monthly
interest and principal payments
on a 30-year amortization period
    
    
    176,000
    
    
    
    Ten-year loan with GECC
collateralized by the Ponte Vedra
Hampton Inn, 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
    
    
    4,706
    
    
    
    4,751Ten-year loan with GECC
collateralized by the Evanston
Hilton Garden Inn, 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, paid off May
2006 (see above)
    
    
    
    
    
    
    11,344Construction loan converted to
permanent loan on March 8, 2005,
collateralized by the Chapel Hill
Courtyard by Marriott Hotel,
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
    
    
    8,802
    
    
    
    8,907Five-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
    
    
    12,804
    
    
    
    12,915Five-year
construction-to-permanent first
mortgage loan for $10.9 million,
collateralized by the Courtyard
by Marriott Hotel constructed in
Kansas City, MO, at a variable
interest rate of 90-day LIBOR
plus 3.5%, interest added to
principal during construction,
principal and interest payments
starting two months after the
final disbursement, based on a
20-year amortization period
    
    
    7,598
    
    
    
    Five-year
construction-to-permanent first
mortgage loan for $12.7 million,
collateralized by the Homewood
suites to be constructed in
Princeton, NJ, at a variable
interest rate of 90-day LIBOR
plus 2.6%, interest added to
principal during construction,
principal and interest payments
starting two months after the
final disbursement, based on a
25-year amortization period
    
    
    3,002
    
    
    
    Five-year
construction-to-permanent first
mortgage loan for $7.9 million,
collateralized by the Hilton
Garden Inn to be constructed in
Akron, OH, at a variable interest
rate of 90-day LIBOR plus 3.0%,
interest added to principal
during construction, principal
and interest payments starting
two months after the final
disbursement, based on a 20-year
amortization schedule
    
    
    1,175
    
    
    
    Five-year recourse
construction-to-permanent first
mortgage loan for $9 million,
collateralized by the Hilton
Garden Inn to be constructed in
Wilmington NC, at a variable
interest rate of 30-day LIBOR
plus 1.8%, interest added to
principal during construction,
principal and interest payments
starting on May 1, 2008, matures
April 1, 2011
    
    
    
    
    
    
    Total
    
    $
    214,087
    
    
    $
    99,874
 27




---



##### 



WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  28




---



##### 



Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations($in thousands except room revenue statistics)
  OVERVIEW
  Hotel Ownership
     29




---



##### 



Hotel Financing
  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
improvement in the operating results of its hotels for
the remainder of 2006.
 
    
    The Company also implements selective capital
improvements designed to increase profitability
consistent with franchisor standards and mandates.
During the six months ended June 30, 2006, the Company
spent approximately $7.2 million for capital
improvements at its hotels. The Company expects total
capital expenditures of approximately $6.8 million for
improvements at its hotels during the remainder of 2006.
 Improving Our Hotel Portfolio.
 
    
    The Company is focused on acquiring hotels with a
favorable current yield and an opportunity for
appreciation. The Company primarily 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 premium limited service,
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 April 2006, the Company completed the
conversion of a former historic residential building in
Kansas City, MO into a 123-room Courtyard by Marriott
hotel. The Company expects two more hotels, that are
currently under development, to open in 2006 and another
 30




---



##### 



to open early in 2007. The Company also has entered
into a joint venture that expects to begin construction
during the third quarter of 2006, on a 120-room
Courtyard by Marriott hotel in Jacksonville, Fla. and
expects to develop a wholly owned 79-room Residence Inn
hotel in Roanoke, Va. The Company was also designated a
preferred developer for the new select-service aloft
brand by Starwood Hotels and Resorts Worldwide, Inc. and
is currently reviewing several potential development
sites on which it can build and own aloft-branded
hotels. The Company is continually looking to develop
additional hotel properties.
 
    
    The Company intends to sell older, underperforming
hotels or hotels that the Company believes no longer
meet the Companys yield objectives and to invest the
funds in selected hotel acquisitions, hotel developments
and hotel loans. During the six months ended June 30,
2006 the Company sold the Dallas, TX Holiday Inn Select,
the Boone, NC Hampton Inn, the Wilmington, NC Comfort
Inn and the Southlake, GA Hampton Inn. The Company
realized aggregate net proceeds on hotel sales during
the six months ended June 30, 2006 of $23.3 million,
resulting in an aggregate net gain of $8.1 million. In
July 2006 the Company sold the West Springfield, MA
Hampton Inn for net proceeds of $9.5 million, resulting
in a net gain of $3.9 million.
 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 2006, the Company closed on
its first two loans in conjunction with this program and
expects to loan a total of $4.0 million during the
construction of the respective hotels, $1.4 million of
which the Company had loaned as of June 30, 2006. In
May 2006, the Company also provided a $20.3 million B
note as part of a $66 million senior note. In June
2006, the Company closed on an $8.5 million
construction-to-permanent loan to finance a 101-room
Hampton Inn & Suites in Murfreesboro, TN that is
estimated to cost $10.2 million.
  Results of Operations for the Three and Six Months Ended June 30, 2006 versus the Three and Six
Months Ended June 30, 2005
 HOTEL OWNERSHIP SEGMENT
 Revenues
  Three Months Ended June 30, (a)
    
    Six Months Ended June 30, (a)2006 vs.
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006 vs.2006 vs.
    
    2005
    
    
    
    
    
    
    
    
    
    2006 vs.
    
    20052005
    
    Percentage
    
    
    
    
    
    
    
    
    
    2005
    
    Percentage2006
    
    2005
    
    Change
    
    Change
    
    2006
    
    2005
    
    Change
    
    ChangeHotel room revenues
    
    $
    42,326
    
    
    $
    32,120
    
    
    $
    10,206
    
    
    
    31.8
    %
    
    $
    77,972
    
    
    $
    60,104
    
    
    $
    17,868
    
    
    
    29.7
    %RevPAR
    
    $
    76.14
    
    
    $
    68.33
    
    
    $
    7.81
    
    
    
    11.4
    %
    
    $
    71.06
    
    
    $
    64.28
    
    
    $
    6.78
    
    
    
    10.5
    %Occupancy
    
    
    74.7
    %
    
    
    74.2
    %
    
    
    0.5
    %
    
    
    0.7
    %
    
    
    72.1
    %
    
    
    70.8
    %
    
    
    1.3
    %
    
    
    1.8
    %Average daily rate (ADR)
    
    $
    101.89
    
    
    $
    92.10
    
    
    $
    9.79
    
    
    
    10.6
    %
    
    $
    98.59
    
    
    $
    90.74
    
    
    $
    7.85
    
    
    
    8.7
    %
 (a)
    
    Includes all owned or partially owned consolidated hotels, excluding discontinued operations
as of June 30, 2006.
 31




---



##### 



Three Months Ended June 30, (a)
    
    Six Months Ended June 30, (a)2006 vs.
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006 vs.2006 vs.
    
    2005
    
    
    
    
    
    
    
    
    
    2006 vs.
    
    20052005
    
    Percentage
    
    
    
    
    
    
    
    
    
    2005
    
    Percentage2006
    
    2005
    
    Change
    
    Change
    
    2006
    
    2005
    
    Change
    
    ChangeHotel room revenues
    
    $
    35,424
    
    
    $
    32,120
    
    
    $
    3,304
    
    
    
    10.3
    %
    
    $
    66,148
    
    
    $
    60,104
    
    
    $
    6,044
    
    
    
    10.1
    %RevPAR
    
    $
    76.17
    
    
    $
    68.33
    
    
    $
    7.84
    
    
    
    11.5
    %
    
    $
    71.50
    
    
    $
    64.28
    
    
    $
    7.22
    
    
    
    11.2
    %Occupancy
    
    
    76.1
    %
    
    
    74.2
    %
    
    
    1.9
    %
    
    
    2.6
    %
    
    
    73.1
    %
    
    
    70.8
    %
    
    
    2.3
    %
    
    
    3.2
    %Average daily rate (ADR)
    
    $
    100.05
    
    
    $
    92.10
    
    
    $
    7.95
    
    
    
    8.6
    %
    
    $
    97.88
    
    
    $
    90.74
    
    
    $
    7.14
    
    
    
    7.9
    %
 (a)
    
    Includes all owned or partially owned consolidated hotels, excluding discontinued operations
as of June 30, 2006 and excluding the New Hotels (defined below).
 Room
  Food and Beverage
 Other Operating Departments
 Expenses
 Rooms
 32




---



##### 



Food and Beverage
 Other Operating Departments
 Property Operating
 Real Estate Taxes and Property and Casualty Insurance
 Franchise Costs
 Maintenance and Repair Costs
 Management Fees
 Depreciation and Amortization
 33




---



##### 



Interest Expense
 (Income) Loss Allocation to Minority Interest in Consolidated Joint Ventures
 Income Tax Expense
 Equity in Income (Loss) of Unconsolidated Joint Ventures
 HOTEL FINANCING SEGMENT
 General and Administrative
 Interest and Other Income
 Interest Expense
 34




---



##### 



GENERAL CORPORATE INCOME AND EXPENSES
  General and Administrative
 Extinguishment of Debt
 Interest and Other Income
 Income (Loss) Allocation to Minority Interest in Partnership
 Discontinued Operations
   35




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
 Overview
  Operating
  Investing
 Overview
  Investment in hotel properties
    36




---



##### 



Proceeds from sale of hotel properties
    Issuance of notes receivable
   Collection of notes receivable
  Investment in unconsolidated joint venture
   Purchase of restricted marketable securities
  37




---



##### 



Financing
 Overview
  Net increase (decrease) in lines of credit
   Proceeds from mortgage loans
    38




---



##### 



Payment of mortgage loans
  Proceeds from issuance of shares
  Distributions to shareholders
  SEASONALITY
  39




---



##### 



OFF-BALANCE SHEET ARRANGEMENTS
  CONTRACTUAL OBLIGATIONS
  OTHER MATTERS
 Critical Accounting Policies
  Allowances for Doubtful Accounts
 Accounts Receivable.
 Notes Receivable.
 Accounting for Long-Lived Assets
 General.
 40




---



##### 



Impairment on Planned Dispositions
 Asset Retirement Obligation
  Accounting for Joint Ventures
  Franchise Agreements
  41




---



##### 



Year of Expiration
    
    Number of Hotels2007
    
    12008
    
    22009
    
    32010
    
    12011
    
    22012
    
    22013
    
    62014
    
    12015
    
    12016
    
    22017
    
    102018
    
    52019
    
    62020
    
    12022
    
    32023
    
    12024
    
    32025
    
    12026
    
    1
   Funds From Operations (FFO)
  42




---



##### 



WINSTON HOTELS, INC.
RECONCILIATION OF NET INCOME TO FFO AND
FFO AVAILABLE TO COMMON SHAREHOLDERS
 ($ in thousands)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    5,566
    
    
    $
    5,776
    
    
    $
    11,846
    
    
    $
    8,754Gain on sale
    
    
    (3,648
    )
    
    
    (471
    )
    
    
    (8,103
    )
    
    
    (381
    )Minority interest in Partnership allocation of income (loss)
    
    
    (16
    )
    
    
    153
    
    
    
    (31
    )
    
    
    208Minority interest in Partnership allocation of gain
on sale of discontinued operations
    
    
    169
    
    
    
    22
    
    
    
    375
    
    
    
    17Minority interest in Partnership allocation of income
from discontinued operations
    
    
    27
    
    
    
    18
    
    
    
    51
    
    
    
    24Depreciation
    
    
    4,914
    
    
    
    3,669
    
    
    
    9,518
    
    
    
    7,316Depreciation from discontinued operations
    
    
    244
    
    
    
    782
    
    
    
    658
    
    
    
    1,613Depreciation from joint ventures
    
    
    265
    
    
    
    189
    
    
    
    523
    
    
    
    380FFO
    
    
    7,521
    
    
    
    10,138
    
    
    
    14,837
    
    
    
    17,931Preferred stock dividend
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (3,680
    )
    
    
    (3,680
    )FFO Available to Common Shareholders *
    
    $
    5,681
    
    
    $
    8,298
    
    
    $
    11,157
    
    
    $
    14,251
 
 *
    
    For 2006, FFO available to common shareholders includes non-recurring debt extinguishment and
certain other non-cash charges totaling $4.3 million and $4.6 million, for the three and six
months ended June 30, 2006, respectively. Excluding these charges, FFO available to common
shareholders would have been $10.0 million and $15.7 million for the three and six months
ended June 30, 2006, respectively. 43




---



##### 



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




---



##### 



As of June 30, 2006
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    Total
    
    Fair ValueVariable rate  GE line:
    
    $
    48,600
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    48,600
    
    
    $
    48,600Average interest rate
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )Variable rate  Marathon facilities:
    
    $
    8,596
    
    
    $
    1,200
    
    
    $
    8,400
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    18,196
    
    
    $
    18,196Average interest rate (g)
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )Mortgage loans:Fixed rate  CMBS (g)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    176,000
    
    
    $
    176,000
    
    
    $
    174,428Average interest rate
    
    
    
    
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %
    
    
    5.94
    %Variable rate  Princeton, NJHomewood Suites (g)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,002
    
    
    $
    
    
    
    $
    3,002
    
    
    $
    3,002Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )Consolidated joint venture loans:Fixed rate  The Stanley Hotel
    
    $
    91
    
    
    $
    232
    
    
    $
    245
    
    
    $
    263
    
    
    $
    11,973
    
    
    $
    
    
    
    $
    12,804
    
    
    $
    12,859Average interest rate
    
    
    
    
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %Fixed rate  Chapel Hill, NCCourtyard by Marriott
    
    $
    108
    
    
    $
    229
    
    
    $
    247
    
    
    $
    267
    
    
    $
    7,951
    
    
    $
    
    
    
    $
    8,802
    
    
    $
    8,761Average interest rate
    
    
    
    
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %Variable rate  Ponte Vedra,
FLHampton Inn
    
    $
    46
    
    
    $
    100
    
    
    $
    109
    
    
    $
    119
    
    
    $
    130
    
    
    $
    4,202
    
    
    $
    4,706
    
    
    $
    4,706Average interest rate
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )
    
    
    (d
    )Variable
rate  Kansas City, MOCourtyard by Marriott (g)
    
    $
    
    
    
    $
    
    
    
    $
    7,598
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,598
    
    
    $
    7,598Average interest rate
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )
    
    
    (e
    )Variable rate  Akron, OHHilton Garden Inn (g)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,175
    
    
    $
    
    
    
    $
    1,175
    
    
    $
    1,175Average interest rate
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
    
    
    (f
    )
 (a)
    
    Rate is 30-day to 180-day LIBOR plus 1.75% to 2.50%, (30-day and 180-day LIBOR were 5.33% and 5.59%,
respectively, at June 30, 2006).
(b) Rate is 30-day LIBOR plus 2.25% or 2.75% or 3.00%.(c)
    
    Construction-to-permanent note of $12.7 million. Rate is 90-day LIBOR plus 2.60% (90-day LIBOR was 5.48% at June 30, 2006).(d)
    
    Rate is 30-day LIBOR plus 3.0%.(e)
    
    Construction-to-permanent note of $10.9 million. Rate is 90-day LIBOR plus 3.5%.(f)
    
    Construction-to-permanent note of $7.9 million. Rate is 90-day LIBOR plus 3.0%.(g)
    
    See Notes 6 and 12 to the Consolidated Financial Statements. 45




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##### 



Item 4. Controls and Procedures
     PART II  OTHER INFORMATION
 Item 4. Submission of Matters to Vote of Security Holders
   Number ofVoted Against or
    
    Broker Non-Name
    
    Votes For
    
    Withheld
    
    votes
    
    TotalsCharles M. Winston
    
    
    23,618,712
    
    
    
    591,744
    
    
    
    
    
    
    
    24,210,456Robert W. Winston
    
    
    23,657,589
    
    
    
    552,867
    
    
    
    
    
    
    
    24,210,456Thomas F. Darden
    
    
    23,072,904
    
    
    
    1,137,552
    
    
    
    
    
    
    
    24,210,456Richard L. Daugherty
    
    
    23,572,402
    
    
    
    638,054
    
    
    
    
    
    
    
    24,210,456Edwin B. Borden
    
    
    23,574,502
    
    
    
    635,954
    
    
    
    
    
    
    
    24,210,456David C. Sullivan
    
    
    23,810,294
    
    
    
    400,162
    
    
    
    
    
    
    
    24,210,456
  Votes for:
    
    
    24,106,288Votes against or withheld:
    
    
    60,788Votes abstained:
    
    
    43,380Total
    
    
    24,210,456
 46




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##### 



Item 6. Exhibits
 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).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.
 47




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##### 



SIGNATURES
  WINSTON HOTELS, INC.
 Date August 9, 2006
    /s/ Joseph V. GreenJoseph V. GreenPresident and Chief Financial Officer
(Authorized officer and Principal Financial
Officer) 48




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##### 



EXHIBIT INDEX
 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).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.
 49