##### 



SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004
    
    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
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.  Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  The number of shares of Common Stock, $.01 par value, outstanding on July 31,
2004 was 26,346,199.




---



##### 



WINSTON HOTELS, INC.
Index PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsWINSTON HOTELS, INC.Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003
    
    
    3Unaudited Consolidated Statements of Operations for the three months ended June 30, 2004 and 2003
    
    
    4Unaudited Consolidated Statements of Operations for the six months ended June 30, 2004 and 2003
    
    
    5Unaudited Consolidated Statement of Shareholders Equity for the six months ended June 30, 2004
    
    
    6Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 4.
Submission of Matters to Vote of Security Holders
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    30SIGNATURES
    
    
    32EXHIBIT INDEX
    
    
    33
  2




---



##### 



WINSTON HOTELS, INC. 
 CONSOLIDATED BALANCE SHEETS  (in thousands, except per share amounts)
 June 30, 2004
    
    December 31, 2003(unaudited)ASSETSLand
    
    $
    43,767
    
    
    $
    44,788Buildings and improvements
    
    
    367,808
    
    
    
    377,109Furniture and equipment
    
    
    49,401
    
    
    
    51,323Operating properties
    
    
    460,976
    
    
    
    473,220Less accumulated depreciation
    
    
    128,118
    
    
    
    128,540332,858
    
    
    
    344,680Properties under development
    
    
    8,843
    
    
    
    3,521Net investment in hotel properties
    
    
    341,701
    
    
    
    348,201Assets held for sale
    
    
    2,100
    
    
    
    2,100Corporate FF&E, net
    
    
    491
    
    
    
    621Cash
    
    
    5,750
    
    
    
    5,623Accounts receivable
    
    
    3,468
    
    
    
    2,505Lease revenue receivable
    
    
    
    
    
    
    179Notes receivable
    
    
    13,394
    
    
    
    5,016Investment in joint ventures
    
    
    2,269
    
    
    
    1,607Deferred expenses, net
    
    
    2,556
    
    
    
    2,935Prepaid expenses and other assets
    
    
    15,323
    
    
    
    8,653Deferred tax asset
    
    
    10,811
    
    
    
    9,821Total assets
    
    $
    397,863
    
    
    $
    387,261LIABILITIES AND SHAREHOLDERS EQUITYDue to banks
    
    $
    40,000
    
    
    $
    29,200Long-term debt
    
    
    84,954
    
    
    
    91,284Accounts payable and accrued expenses
    
    
    12,396
    
    
    
    11,484Distributions payable
    
    
    5,987
    
    
    
    5,870Total liabilities
    
    
    143,337
    
    
    
    137,838Minority interest
    
    
    10,645
    
    
    
    17,489Shareholders equity:Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 shares issued and outstanding
    
    
    
    
    
    
    30Preferred stock, $.01 par value, 5,000,000 shares authorized,
3,680,000 shares issued and outstanding (liquidation
preference of $93,840)
    
    
    37
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized,
26,346,319 and 26,270,805 shares issued and outstanding
    
    
    264
    
    
    
    263Additional paid-in capital
    
    
    323,402
    
    
    
    307,089Accumulated other comprehensive loss
    
    
    
    
    
    
    (33
    )Unearned compensation
    
    
    (954
    )
    
    
    (527
    )Distributions in excess of earnings
    
    
    (78,868
    )
    
    
    (74,888
    )Total shareholders equity
    
    
    243,881
    
    
    
    231,934Total liabilities and shareholders equity
    
    $
    397,863
    
    
    $
    387,261
 The accompanying notes are an integral part of the consolidated financial statements. 3




---



##### 



WINSTON HOTELS, INC. 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share amounts)
 Three Months Ended
    
    Three Months EndedJune 30, 2004
    
    June 30, 2003Revenue:Rooms
    
    $
    33,257
    
    
    $
    29,284Food and beverage
    
    
    2,419
    
    
    
    1,961Other operating departments
    
    
    1,044
    
    
    
    1,043Percentage lease revenue
    
    
    9
    
    
    
    511Joint venture fee income
    
    
    45
    
    
    
    79Total revenue
    
    
    36,774
    
    
    
    32,878Hotel operating expenses:Rooms
    
    
    7,273
    
    
    
    6,564Food and beverage
    
    
    1,751
    
    
    
    1,411Other operating departments
    
    
    721
    
    
    
    691Undistributed operating expenses:Property operating expenses
    
    
    7,177
    
    
    
    5,900Real estate taxes and property and casualty insurance
    
    
    1,656
    
    
    
    1,666Franchise costs
    
    
    2,381
    
    
    
    2,105Maintenance and repair
    
    
    1,842
    
    
    
    1,655Management fees
    
    
    871
    
    
    
    704Percentage lease expense
    
    
    
    
    
    
    1,302General and administrative
    
    
    1,508
    
    
    
    1,470Depreciation
    
    
    4,398
    
    
    
    4,331Amortization
    
    
    331
    
    
    
    221Total operating expenses
    
    
    29,909
    
    
    
    28,020Operating income
    
    
    6,865
    
    
    
    4,858Interest and other income
    
    
    424
    
    
    
    285Interest expense
    
    
    1,673
    
    
    
    1,913Income 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
    
    
    5,616
    
    
    
    3,230Income allocation to minority interest in Partnership
    
    
    185
    
    
    
    94Income allocation to minority interest in consolidated joint ventures
    
    
    78
    
    
    
    Income tax benefit
    
    
    (285
    )
    
    
    (142
    )Equity in loss of unconsolidated joint ventures
    
    
    (33
    )
    
    
    (81
    )Income from continuing operations
    
    
    5,605
    
    
    
    3,197Discontinued operations:Earnings from discontinued operations
    
    
    200
    
    
    
    200Loss on sale of discontinued operations
    
    
    (270
    )
    
    
    Loss on impairment of asset held for sale
    
    
    (24
    )
    
    
    Net income
    
    
    5,511
    
    
    
    3,397Preferred stock distribution
    
    
    (1,840
    )
    
    
    (1,734
    )Net income available to common
shareholders
    
    $
    3,671
    
    
    $
    1,663Income per common share:Basic and diluted:Income from continuing operations
    
    $
    0.14
    
    
    $
    0.07Income from discontinued operations
    
    
    
    
    
    
    0.01Net income per common share
    
    $
    0.14
    
    
    $
    0.08Weighted average number of common shares
    
    
    26,217
    
    
    
    20,078Weighted average number of common shares assuming dilution
    
    
    27,542
    
    
    
    21,377
 The accompanying notes are an integral part of the consolidated financial statements. 4




---



##### 



WINSTON HOTELS, INC. 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share amounts)
 Six Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Revenue:Rooms
    
    $
    62,511
    
    
    $
    55,133Food and beverage
    
    
    4,379
    
    
    
    3,647Other operating departments
    
    
    2,037
    
    
    
    2,134Percentage lease revenue
    
    
    701
    
    
    
    1,068Joint venture fee income
    
    
    73
    
    
    
    149Total revenue
    
    
    69,701
    
    
    
    62,131Hotel operating expenses:Rooms
    
    
    13,885
    
    
    
    12,639Food and beverage
    
    
    3,220
    
    
    
    2,716Other operating departments
    
    
    1,445
    
    
    
    1,427Undistributed operating expenses:Property operating expenses
    
    
    14,236
    
    
    
    11,849Real estate taxes and property and casualty insurance
    
    
    3,313
    
    
    
    3,345Franchise costs
    
    
    4,484
    
    
    
    3,916Maintenance and repair
    
    
    3,674
    
    
    
    3,240Management fees
    
    
    1,595
    
    
    
    1,252Percentage lease expense
    
    
    
    
    
    
    2,210General and administrative
    
    
    3,140
    
    
    
    2,957Depreciation
    
    
    8,832
    
    
    
    8,831Amortization
    
    
    660
    
    
    
    442Total operating expenses
    
    
    58,484
    
    
    
    54,824Operating income
    
    
    11,217
    
    
    
    7,307Interest and other income
    
    
    756
    
    
    
    581Interest expense
    
    
    3,404
    
    
    
    3,875Income 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
    
    
    8,569
    
    
    
    4,013Income allocation to minority interest in Partnership
    
    
    181
    
    
    
    74Income allocation to minority interest in consolidated joint ventures
    
    
    262
    
    
    
    Income tax benefit
    
    
    (973
    )
    
    
    (630
    )Equity in income (loss) of unconsolidated joint ventures
    
    
    (54
    )
    
    
    54Income from continuing operations
    
    
    9,045
    
    
    
    4,623Discontinued operations:Earnings from discontinued operations
    
    
    265
    
    
    
    308Gain on sale of discontinued operations
    
    
    15
    
    
    
    Loss on impairment of asset held for sale
    
    
    (47
    )
    
    
    Net income
    
    
    9,278
    
    
    
    4,931Preferred stock distribution
    
    
    (3,635
    )
    
    
    (3,469
    )Loss on redemption of Series A Preferred Stock
    
    
    (1,720
    )
    
    
    Net income available to common
shareholders
    
    $
    3,923
    
    
    $
    1,462Income per common share:Basic and diluted:Income from continuing operations
    

    $
    0.14
    
    
    $
    0.06Income from discontinued operations
    
    
    0.01
    
    
    
    0.01Net income per common share
    
    $
    0.15
    
    
    $
    0.07Weighted average number of common shares
    
    
    26,216
    
    
    
    20,076Weighted average number of common shares assuming dilution
    
    
    27,561
    
    
    
    21,375
 The accompanying notes are an integral part of the consolidated financial statements. 5




---



##### 



WINSTON HOTELS, INC. 
 UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004  (in thousands, except per share amounts)
 Preferred Stock
    
    Common Stock
    
    AdditionalPaid-inShares
    
    Dollars
    
    Shares
    
    Dollars
    
    CapitalBalances at December 31, 2003
    
    
    3,000
    
    
    $
    30
    
    
    
    26,271
    
    
    $
    263
    
    
    $
    307,089Issuance of shares and other
    
    
    3,680
    
    
    
    37
    
    
    
    75
    
    
    
    1
    
    
    
    89,563Redemption of Preferred A Stock
    
    
    (3,000
    )
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    (73,250
    )Distributions ($0.30 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions ($0.353 per preferred A share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions ($0.70 per preferred B share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized holding loss arising on interest
rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeBalances at June 30, 2004
    
    
    3,680
    
    
    $
    37
    
    
    
    26,346
    
    
    $
    264
    
    
    $
    323,402
   [Continued from above table, first column(s) repeated] AccumulatedDistributions
    
    Other
    
    TotalUnearned
    
    In Excess of
    
    Comprehensive
    
    ShareholdersCompensation
    
    Earnings
    
    Loss
    
    EquityBalances at December 31, 2003
    
    $
    (527
    )
    
    $
    (74,888
    )
    
    $
    (33
    )
    
    $
    231,934Issuance of shares and other
    
    
    (765
    )
    
    
    
    
    
    
    
    
    
    
    88,836Redemption of Preferred A Stock
    
    
    
    
    
    
    (1,720
    )
    
    
    
    
    
    
    (75,000
    )Distributions ($0.30 per common share)
    
    
    
    
    
    
    (7,903
    )
    
    
    
    
    
    
    (7,903
    )Distributions ($0.353 per preferred A share)
    
    
    
    
    
    
    (1,059
    )
    
    
    
    
    
    
    (1,059
    )Distributions ($0.70 per preferred B share)
    
    
    
    
    
    
    (2,576
    )
    
    
    
    
    
    
    (2,576
    )Unearned compensation amortization
    
    
    338
    
    
    
    
    
    
    
    
    
    
    
    338Comprehensive income:Net income
    
    
    
    
    
    
    9,278
    
    
    
    Unrealized holding loss arising on interest
rate swap
    
    
    
    
    
    
    
    
    
    
    33Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,311Balances at June 30, 2004
    
    $
    (954
    )
    
    $
    (78,868
    )
    
    $
    
    
    
    $
    243,881
 The accompanying notes are an integral part of the consolidated financial statements. 6




---



##### 



WINSTON HOTELS, INC. 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  ($ in thousands)
 Six Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Cash flows from operating activities:Net income
    
    $
    9,278
    
    
    $
    4,931Adjustments to reconcile net income to net cash
provided by operating activities:Income allocation to minority interest in Partnership
    
    
    193
    
    
    
    94Income allocation to minority interest in consolidated
joint ventures
    
    
    262
    
    
    
    Depreciation
    
    
    9,024
    
    
    
    9,270Amortization
    
    
    660
    
    
    
    442Income tax benefit
    
    
    (990
    )
    
    
    (683
    )Gain on sale of hotel properties
    
    
    (16
    )
    
    
    Loss on impairment of hotel properties
    
    
    50
    
    
    
    (Income) loss allocations from unconsolidated joint ventures
    
    
    54
    
    
    
    (54
    )Distributions from joint ventures
    
    
    31
    
    
    
    719Unearned compensation amortization
    
    
    338
    
    
    
    269Changes in assets and liabilities:Lease revenue receivable
    
    
    179
    
    
    
    (169
    )Accounts receivable
    
    
    (963
    )
    
    
    (1,407
    )Prepaid expenses and other assets
    
    
    (6,670
    )
    
    
    429Accounts payable and accrued expenses
    
    
    945
    
    
    
    295Net cash provided by operating activities
    
    
    12,375
    
    
    
    14,136Cash flows from investing activities:Notes receivable
    
    
    (8,378
    )
    
    
    Deferred acquisition costs
    
    
    10
    
    
    
    Acquisition of minority interest
    
    
    (8,162
    )
    
    
    Investment in hotel properties, net
    
    
    (11,108
    )
    
    
    (3,705
    )Sale of hotel properties
    
    
    10,533
    
    
    
    Investment in unconsolidated joint ventures
    
    
    (747
    )
    
    
    (1
    )Net cash used in investing activities
    
    
    (17,852
    )
    
    
    (3,706
    )Cash flows from financing activities:Fees paid in connection with financing activities
    
    
    (297
    )
    
    
    (15
    )Payment of distributions to shareholders
    
    
    (11,421
    )
    
    
    (9,520
    )Payment of distributions to minority interest in Partnership
    
    
    (389
    )
    
    
    (390
    )Distributions to minority interest in consolidated joint ventures
    
    
    (569
    )
    
    
    Proceeds from issuance of Series B Preferred shares, net
    
    
    88,810
    
    
    
    Redemption of Series A Preferred shares, net
    
    
    (75,000
    )
    
    
    Net increase in due to banks
    
    
    10,800
    
    
    
    3,900Net decrease in long-term debt
    
    
    (6,330
    )
    
    
    (675
    )Net cash provided by (used in) financing activities
    
    
    5,604
    
    
    
    (6,700
    )Net increase in cash
    
    
    127
    
    
    
    3,730Cash at beginning of period
    
    
    5,623
    
    
    
    1,510Cash at end of period
    
    $
    5,750
    
    
    $
    5,240Supplemental disclosure:Cash paid for interest
    
    $
    3,462
    
    
    $
    4,558Summary of non-cash investing and financing activities:Distributions to shareholders declared but not paid
    
    $
    11,538
    
    
    $
    4,763Distributions to minority interest in Partnership declared but not paid
    
    
    389
    
    
    
    195Deferred equity compensation
    
    
    764
    
    
    
    354Interest rate swap adjustment to market value
    
    
    33
    
    
    
    143Adjustment to minority interest due to issuance of common stock and
change in accumulated other comprehensive loss
    
    
    26
    
    
    
    (8
    )
 The accompanying notes are an integral part of the consolidated financial statements. 7




---



##### 



WINSTON HOTELS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  1.
    
    ORGANIZATIONWinston Hotels, Inc. (the Company), headquartered in Raleigh, North
Carolina, operates so as to qualify as a real estate investment trust
(REIT) for federal income tax purposes. During 1994, the Company
completed an initial public offering of its common stock (Common Stock),
utilizing the majority of the proceeds to acquire one hotel and a general
partnership interest (as the sole general partner) in WINN Limited
Partnership (the Partnership). The Partnership used a substantial portion
of the proceeds to acquire nine additional hotel properties. The Company
and the Partnership (together with the Partnerships wholly owned
subsidiaries, Barclay Hospitality Services Inc. (Barclay), Winston SPE,
LLC, and Winston Finance LLC), are collectively referred to as the
Company. As of June 30, 2004, the Companys ownership in the Partnership
was 95.30 percent.The accompanying unaudited consolidated financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of
the interim financial statements. All such adjustments are of a normal and
recurring nature. Certain reclassifications have been made to the 2003
financial statements to conform to the 2004 presentation. These
reclassifications have no effect on net income or shareholders equity
previously reported. Due to the seasonality of the hotel business, the
information for the six months ended June 30, 2004 and 2003 is not
necessarily indicative of the results for a full year. This Form 10-Q
should be read in conjunction with the Companys Annual Report on Form 10-K
for the year ended December 31, 2003.As of June 30, 2004, the Company owned or was invested in 49 hotel
properties in 15 states having an aggregate of 6,943 rooms. This included
44 wholly owned properties with an aggregate of 6,262 rooms, a 49 percent
ownership interest in one joint venture hotel with an aggregate of 118
rooms, and a 13.05 percent ownership interest in four joint venture hotels
with an aggregate of 563 rooms. The Company also held a 48.78% ownership
interest in another joint venture that is currently constructing a 147-room
Courtyard by Marriott hotel that is scheduled to open in September 2004.
The Company also had issued hotel loans to owners of five hotels with an
aggregate of 881 rooms. The Company does not hold an ownership interest in
any of the hotels for which it has provided financing. All of the Companys
hotels are operated under franchises from nationally recognized franchisors
including Marriott International, Inc., Hilton Hotels Corporation,
Intercontinental Hotels Group PLC, (formerly Six Continents PLC) and Choice
Hotels International.Currently, Alliance Hospitality Management, LLC manages 40 of the Companys
49 hotels, Concord Hospitality Enterprises Company manages three hotels,
Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation manages three
hotels, and New Castle Hotels, LLC, Noble Investment Group, Ltd., and Prism
Hospitality Corp. each manage one hotel.In March 2004, the Company negotiated the transfer of the long-term lease
with Secaucus Holding Corporation, a wholly owned subsidiary of Prime
Hospitality Corp. (Prime) for the Secaucus, NJ Holiday Inn to Barclay.
The Company received a net payment from Prime of $269 as part of the
negotiated settlement. This amount is included in percentage lease revenue
in the accompanying unaudited consolidated statement of operations for the
six months ended June 30 2004. Alliance manages the hotel. With the
transfer of this lease to Barclay, the Company is no longer the lessor of
any hotel leases with unrelated third parties. Therefore, unless the
Company enters into third party hotel leases, as the lessor, in the future,
the Company will not earn percentage lease revenue in the future.2.
    
    MINORITY INTERESTMinority interest as of June 30, 2004 and December 31, 2003, consists of
minority interest in the Partnership of $7,449 and $7,671, respectively, and
minority interest in consolidated joint ventures of $3,196 and $9,818,
respectively. 8




---



##### 



Minority Interest in the Partnership.Certain hotel properties have been
acquired, in part, by the Partnership, through the issuance of limited
partnership units of the Partnership. The equity interest in the
Partnership created by these transactions represents the Companys minority
interest. The Companys minority interest is: (i) increased or decreased by
its pro-rata share of the net income or net loss, respectively, of the
Partnership; (ii) decreased by distributions to unit holders; (iii)
decreased by redemption of Partnership units for the Companys Common Stock;
and (iv) adjusted to equal the net equity of the Partnership multiplied by
the limited partners ownership percentage immediately after each issuance
of units of the Partnership and/or Common Stock of the Company through an
adjustment to additional paid-in capital. Income (loss) is allocated to
minority interest based on the weighted average percentage ownership
throughout the year.Minority Interest in Consolidated Joint Ventures.Certain ownership
interests in hotel properties have been acquired, in part, by the Company,
through joint venture agreements. The equity interests of the Companys
joint venture partners of the consolidated joint ventures represent the
Companys minority interest (see Note 9). The Companys minority interest
is: (i) increased or decreased by its joint venture partners pro-rata share
of the net income or net loss of the respective joint venture, and (ii)
decreased by distributions to its joint venture partners. Income (loss) is
allocated to minority interest in accordance with the provisions of each
joint ventures operating agreement.3.
    
    DERIVATIVE INSTRUMENTSThe Companys financing facilities consist of a $125,000 variable rate line
of credit that matures in December 2004 (the Line); a $71,000 fixed rate
(7.375 percent) loan with a ten-year maturity, due December 1, 2008, and a
twenty-five-year amortization period; a $5,100 variable rate (LIBOR +3%)
loan with a ten-year maturity, due February 1, 2011, and a twenty-five-year
amortization period; a $12,300 variable rate (LIBOR +3%) loan with a
ten-year maturity, due August 1, 2011, and a twenty-year amortization
period; and a $9,147 variable rate (LIBOR + 3.8% during construction)
construction loan with a funding cutoff date of October 1, 2004, at which
time the interest rate will be fixed and the payments will be determined.
The Line, which expires in December 2004, bears interest generally at rates
from 30-day LIBOR plus 1.75% to 30-day LIBOR plus 2.50%, based on the
Companys consolidated debt leverage ratio as of the end of each previous
calendar quarter. The Companys interest rate as of June 30, 2004 was
30-day LIBOR (1.34% as of June 30, 2004) plus 1.75%. The Companys interest
rate beginning July 1, 2004 and for the third quarter remained at 30-day
LIBOR plus 1.75%.To seek to manage overall interest rate risk, the Company uses interest rate
hedging instruments to convert a portion of its variable-rate debt to
fixed-rate debt. Interest rate differentials that arise under these
instruments are recognized as interest expense over the life of the
contracts. The Companys only such instrument during the six months ended
June 30, 2004 was an interest rate swap instrument, the term of which
started March 31, 2003 and ended February 27, 2004. The interest rate swap
instrument effectively replaced the Companys variable interest rate based
on 30-day LIBOR on $50,000 of the Line with a fixed interest rate based on a
base rate of 1.505% until February 27, 2004, and was therefore characterized
as a cash flow hedge. The Lines interest rate spread was 1.75% equating to
an effective fixed rate of 3.255% on $50,000 from January 1, 2004 to
February 27, 2004.4.
    
    EARNINGS PER SHAREThe following is a reconciliation of net income available to common
shareholders used in the net income per common share calculation to the net
income assuming dilution used in the net income per common shares  assuming
dilution calculation: 9




---



##### 



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Income from continuing operations
    
    $
    5,605
    
    
    $
    3,197
    
    
    $
    9,045
    
    
    $
    4,623Less: preferred shares distribution
    
    
    (1,840
    )
    
    
    (1,734
    )
    
    
    (3,635
    )
    
    
    (3,469
    )Less: loss on redemption of Series A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    (1,720
    )
    
    
    Income from continuing operations to common shareholders
    
    
    3,765
    
    
    
    1,463
    
    
    
    3,690
    
    
    
    1,154Income (loss) from discontinued operations
    
    
    (94
    )
    
    
    200
    
    
    
    233
    
    
    
    308Net income available to common shareholders
    
    
    3,671
    
    
    
    1,663
    
    
    
    3,923
    
    
    
    1,462Plus: income allocation to minority interest in Partnership
    
    
    181
    
    
    
    107
    
    
    
    193
    
    
    
    94Net income assuming dilution
    
    $
    3,852
    
    
    $
    1,770
    
    
    $
    4,116
    
    
    $
    1,556
  The following is a reconciliation of the weighted average shares used in net
income per common share to the weighted average shares used in net income
per common share  assuming dilution: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Weighted average number of common shares
    
    
    26,217
    
    
    
    20,078
    
    
    
    26,216
    
    
    
    20,076Minority interest units with redemption rights
    
    
    1,299
    
    
    
    1,299
    
    
    
    1,299
    
    
    
    1,299Stock options and stock grants
    
    
    26
    
    
    
    
    
    
    
    46
    
    
    
    Weighted average number of common shares
assuming dilution
    
    
    27,542
    
    
    
    21,377
    
    
    
    27,561
    
    
    
    21,375
  During the first two quarters of 2004, the Company declared quarterly cash
dividends of $0.15 per common share, $0.578125 per Series A preferred share
for the period from January 1, 2004 through February 24, 2004, $0.20 per
Series B preferred share for the period from February 24, 2004 (the issuance
date of the new Series B cumulative preferred stock) through March 31, 2004
and $0.50 per Series B preferred share for the period from April 1, 2004
through June 30, 2004.5.
    
    INCOME TAXESThe Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. Under SFAS 109, the Company accounts for income taxes
using the asset and liability method under which deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The income tax
benefit for the six months ended June 30, 2004 consists of a deferred
federal income tax benefit of $896 and a deferred state income tax benefit
of $77.The benefit from income taxes and related deferred tax asset were calculated
using an effective tax rate of 38 percent applied to the loss of Barclay.
The deferred tax asset also relates to the cost of acquiring the leases for
47 of the Companys hotel properties from Interstate, which was expensed for
financial reporting purposes in 2002. For tax purposes, this payment is
being amortized over the lives of the leases. The Company believes that
Barclay, through strategic tax planning, will generate sufficient future
taxable income to realize in full the deferred tax asset. Accordingly, no
valuation allowance has been recorded as of June 30, 2004.6.
    
    STOCK-BASED COMPENSATIONThe Company has one stock-based employee compensation plan, the Winston
Hotels, Inc. Stock Incentive Plan (the Plan). The Company accounts for
this plan under the recognition and measurement principles of APB 10




---



##### 



Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in
net income for the issuance of options, as all options granted under the
Plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the
effect on net income available to common shareholders and net income (loss)
per share as if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, as amended by FASB Statement No. 148, to stock-based employee
compensation. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income available to common shareholders, as reported
    
    $
    3,671
    
    
    $
    1,663
    
    
    $
    3,923
    
    
    $
    1,462Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    
    
    
    
    5
    
    
    
    1
    
    
    
    9Pro forma net income available to common
shareholders
    
    $
    3,671
    
    
    $
    1,658
    
    
    $
    3,922
    
    
    $
    1,453Earnings per share:Basic and diluted  as reported
    
    $
    0.14
    
    
    $
    0.08
    
    
    $
    0.15
    
    
    $
    0.07Basic and diluted  pro forma
    
    $
    0.14
    
    
    $
    0.08
    
    
    $
    0.15
    
    
    $
    0.07
  7.
    
    ACCOUNTING FOR LONG-LIVED ASSETSThe Company evaluates the potential impairment of its individual long-lived
assets, principally its wholly owned hotel properties and the hotel
properties in which it owns an interest through joint ventures in accordance
with FASB No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets (FASB No. 144). The Company records an impairment charge when it
believes an investment in a hotel has been impaired, such that the Companys
estimate of future undiscounted cash flows, together with its estimate of an
anticipated liquidation amount, would not recover the then current carrying
value of the investment in the hotel property, or when the Company
classifies a property as held for sale pursuant to FASB No. 144 and the
carrying value exceeds fair market value. The Company considers many
factors and makes certain subjective assumptions when making this
assessment, including but not limited to, general market and economic
conditions, operating results over the past several years, the performance
of similar properties in the same market and expected future operating
results based on a variety of assumptions. Future adverse changes in market
conditions or poor operating results of underlying investments could result
in losses or an inability to recover the carrying value of the investments,
thereby possibly requiring an impairment charge in the future. In addition,
if the Companys assumptions regarding future undiscounted cash flows and
anticipated liquidation amounts are incorrect, a future impairment charge
may be required. Further, the Company currently owns certain hotels for
which the carrying value exceeds current market value. The Company does not
believe an impairment charge for these hotels is appropriate since the
Companys forecast of future undiscounted cash flows, including an
anticipated liquidation amount, exceeds the current carrying value. However, should the Company
approve of a plan to sell these properties, an impairment charge would be
required.  The Companys franchisors periodically inspect the Companys hotels to
ensure they meet certain brand standards primarily pertaining to the
condition of the property and its guest service scores. In connection with
these routine reviews, the Company has received default notices from the
franchisor for two of its hotels. The Company is in the process of curing
these deficiencies to comply with the franchisors standards and expects to
receive an acceptable rating for both hotels. 11




---



##### 



8.
    
    SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURESThe Company participates in four joint venture agreements to develop and own
hotel properties, one with Marsh Landing Investment, L.L.C. (Marsh
Landing), one with Charlesbank Capital Partners, LLC (Charlesbank) and
Concord Hospitality Enterprises Company (Concord), one with Charlesbank
and Shelton III Hotel Equity LLC, owned in part by New Castle Hotels LLC
(New Castle), and one with Chapel Hill Investments, LLC. The Company
entered into the joint ventures with Marsh Landing during 2000, with
Charlesbank and Concord during the fourth quarter of 2002, with Chapel Hill
Investments, LLC during the third quarter of 2003, and with Charlesbank and
New Castle during the first quarter of 2004.The Company currently owns a 49 percent interest in the joint venture with
Marsh Landing that owns the Ponte Vedra, FL Hampton Inn. Charles Winston
and James Winston, both of whom are directors of the Company, control the
remaining 51 percent interest in the Marsh Landing joint venture. The
results of operations for the three and six months ended June 30, 2004 and
the balance sheet as of June 30, 2004 and December 31, 2003 of this joint
venture are consolidated in the Companys consolidated financial statements
and all intercompany accounts are eliminated pursuant to FASB Interpretation
No. 46 (see Note 9).During the first quarter of 2004, the Company purchased its joint venture
partners ownership interest in both the Evanston Hotel Associates, LLC
Joint Venture (the Evanston Joint Venture) and the Windsor Hotel
Associates, LLC Joint Venture (the Windsor Joint Venture). Prior to the
purchase, Regent Partners, Inc. owned 51 percent of the Evanston Joint
Venture and 42.35 percent of the Windsor Joint Venture, and the Company
owned 49 percent and 57.65 percent, respectively. The amount paid for
Regents ownership interest in the Evanston Joint Venture totaled
approximately $6,900, and was based on an imputed value of $25,250 for the
sale of the hotel, subject to approximately $11,800 of debt. The amount
paid for Regents ownership interest in the Windsor Joint Venture totaled
approximately $1,200, and was based on an imputed value of $12,250 for the
sale of the hotel, net of debt paid off of approximately $9,300. As a
result of these purchases, the Company wholly owns the Evanston, IL Hilton
Garden Inn (the Evanston hotel) and the Windsor, CT Hilton Garden Inn (the
Windsor hotel) hotels. Prior to the purchase, Barclay leased the Evanston
hotel and Windsor Lessee Company LLC leased the Windsor hotel. Barclay
continues to lease the Evanston hotel and, as a result of the purchase,
Barclay assumed the lease of the Windsor hotel from Windsor Lessee Company
LLC. The results of operations for the three and six months ended June 30,
2004 and the balance sheets as of June 30, 2004 and December 31, 2003 of
these hotels are consolidated in the Companys consolidated financial
statements and all intercompany accounts are eliminated.During 2002, the Company entered into a joint venture agreement with
Charlesbank with the intention to acquire more than $100,000 of hotel assets
(the Charlesbank Venture). Charlesbank is a private investment firm that
manages capital on behalf of a wide range of institutional investors. The
Charlesbank Venture and Concord subsequently formed a new joint venture
entity, WCC Project Company LLC. The Charlesbank Venture is the managing
member of WCC Project Company LLC. The West Des Moines, IA Fairfield Inn &
Suites, the Beachwood, OH Courtyard by Marriott, and the Houston, TX
Springhill Suites by Marriott are owned by WCC Project Company LLC.
Charlesbank owns an indirect ownership interest of 73.95 percent of WCC
Project Company LLC, Concord owns 13 percent and the Company owns an
indirect ownership interest of 13.05 percent. During the first quarter of 2004, the Charlesbank Venture and New
Castle formed a new joint venture entity, WNC Project Company LLC. New
Castle is the managing member of WNC Project Company LLC. The Shelton, CT
Ramada Plaza hotel, which was purchased in the first quarter of 2004, is
owned by WNC Project Company LLC. This hotel is currently being renovated
and is expected to be converted to a Courtyard by Marriott during the first
quarter of 2005. Charlesbank owns an indirect ownership interest of 73.95
percent of WNC Project Company LLC, New Castle owns 13 percent and the
Company owns an indirect ownership interest of 13.05 percent. The total

hotel assets of the four hotels owned, in part, by the Charlesbank Venture
were approximately $38 million as of June 30, 2004, and are expected to be
approximately $44 million upon completion of all renovation procedures. 12




---



##### 



During the third quarter of 2003, the Company entered into a joint venture
agreement (the Chapel Hill Joint Venture) with Chapel Hill Investments,
LLC to develop and own hotel properties. The Chapel Hill Joint Venture is
currently developing a 147-room Courtyard by Marriott hotel in Chapel Hill,
NC, which is expected to open in September, 2004. The Chapel Hill
Courtyard by Marriott hotel will be leased to Chapel Hill Lessee Company,
LLC. The Company currently owns a 48.78 percent interest in both the Chapel
Hill Joint Venture and Chapel Hill Lessee Company, LLC, while Chapel Hill
Investments, LLC owns a 51.22 percent interest in both entities. The
Company also has provided an additional $1,453 to capitalize the development
of the hotel in exchange for a preferred membership interest (Preferred
Contribution) in the Chapel Hill Joint Venture. The Company will receive
$700 for development services provided during construction. Chapel Hill
Investments, LLC is owned 52 percent by Charles Winston and James Winston,
both of whom are directors of the Company, and 48 percent by three unrelated
private investors. The results of operations for the three and six months
ended June 30, 2004 and the balance sheet as of June 30, 2004 and December
31, 2003 of this joint venture are consolidated in the Companys
consolidated financial statements and all intercompany accounts are
eliminated pursuant to FASB Interpretation No. 46 (see Note 9).As of June 30, 2004, total assets of the two unconsolidated joint ventures,
one with Charlesbank and Concord and one with Charlesbank and New Castle
were $38,291, total liabilities were $24,820, and total equity was $13,471.
For the three and six months ended June 30, 2004, total revenue of the two
unconsolidated joint ventures was $2,744 and $5,050 respectively, total
expenses were $2,958 and $5,391 respectively, resulting in net loss of
($214) and ($341) respectively.As of June 30, 2004, total assets of the two consolidated joint ventures,
one with Marsh Landing Investments, LLC and one with Chapel Hill
Investments, LLC were $17,019, total liabilities were $10,769, and total
equity was $6,250. For the three and six months ended June 30, 2004, total
revenue of the two consolidated joint ventures was $408 and $811
respectively, total expenses were $256 and $502 respectively, resulting in
net income of $152 and $309 respectively. The Companys resulting share
of the net income was $75 and $152 respectively.For the period during the first quarter of 2004 that Evanston, Windsor and
Windsor Lessee were not wholly owned by the Company, their total revenue was
$1,674, total expenses were $1,472, resulting in net income of $202. The
Companys resulting share of the net income was $98.9.
    
    RECENT ACCOUNTING PRONOUNCEMENTSFASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51 (ARB No.
51), was issued in January 2003. This Interpretation clarifies the
application of ARB No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support from other parties, referred to as variable interest
entities (VIE). FIN 46 explains the concept of a VIE and generally
requires consolidation by the party that has a majority of the risk and/or
rewards, referred to as the primary beneficiary.This Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus, to improve
comparability between enterprises engaged in similar activities even if
some of those activities are conducted through variable interest entities.
Including the assets, liabilities, and results of activities of variable
interest entities in the consolidated financial statements of their primary
beneficiaries will provide more complete information about the resources,
obligations, risks, and opportunities of the consolidated enterprise.
Disclosures about variable interest entities in which an enterprise has a
significant variable interest but does not consolidate will help financial
statement users assess the enterprises risks.This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which
an enterprise obtains a variable interest after that date. For the Company, it 13




---



##### 



applies in the first fiscal year or interim period ending after December
15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003.As discussed in Note 8 above, the Company participates in four joint venture
agreements to develop and own hotel properties. The Company has also issued
five mezzanine loans to owners of five hotels. The management of the
Company has analyzed the terms and provisions of each of these arrangements,
and has determined the following:Marsh Landing Joint Venture:This joint venture is considered to be a VIE and the Company is considered
to be the primary beneficiary. Therefore, the Company, which owns a 49
percent interest, has consolidated the balance sheet of the Marsh Landing
Joint Venture beginning as of December 31, 2003, and has consolidated the
results of operations beginning with the first quarter of 2004. For the
three and six months ended June 30, 2004, total revenue of the joint venture
was $408 and $809 respectively, total expenses were $191 and 383
respectively, resulting in a net income of $217 and $426 respectively. As
of June 30, 2004, total assets of the joint venture were $7,304, total
liabilities were $4,968, resulting in stockholders equity totaling $2,336.
The Companys share of the equity of this joint venture totaled $1,145 as of
June 30, 2004.Charlesbank Joint Ventures:The Company has determined that it is not required to consolidate either of
the Charlesbank joint ventures as it is not the primary beneficiary.
Therefore, the Company, which owns an indirect ownership interest of 13.05
percent, has accounted for and will continue to account for its investment
under the equity method of accounting. For the three and six months ended
June 30, 2004, total revenue of the Charlesbank joint ventures was $2,744
and 5,050 respectively, total expenses were $2,958 and 5,391 respectively,
resulting in net loss of $(214) and $(341) respectively. As of June 30,
2004, total assets of the joint ventures were $38,291, total liabilities
were $24,820, resulting in stockholders equity totaling $13,471. The
Companys equity balance exposed to loss as a result of its involvement in
these joint ventures totaled $1,757 as of June 30, 2004.Regent Joint Ventures:During the first quarter of 2004, the Company purchased its joint venture
partners ownership interest in both the Windsor Joint Venture and the
Evanston Joint Venture (see Note 8). These two joint ventures owned the
Windsor hotel and the Evanston hotel. These joint ventures were considered
to be VIEs and the Company was considered to be the primary beneficiary.
Therefore, the Company, which owned a 57.65% interest and a 49% interest,
respectively, consolidated the balance sheets of the Windsor Joint Venture
and the Evanston Joint Venture beginning as of December 31, 2003, and
consolidated the results of operations beginning with the first quarter of
2004. For the period that these properties were owned by joint ventures,
total revenues of the Windsor Joint Venture and the Evanston Joint Venture
were $362 and $494, respectively, total expenses were $240 and $281,
respectively, resulting in net income of $122 and $213, respectively.The Company also owned a 57.65% interest in Windsor Lessee Company, LLC, the
lessee of the Windsor hotel. Barclay assumed this lease at the time the
Company purchased Regents interest in the Windsor Joint Venture. This
joint venture was considered to be a VIE and the Company was considered to
be the primary beneficiary. The Company consolidated the balance sheet of
Windsor Lessee Company, LLC beginning as of December 31, 2003, and
consolidated the results of operations beginning with the first quarter of
2004. For the period that the lessee was a joint venture, total revenue of Windsor Lessee Company, LLC was
$818, total expenses were $951 resulting in a net loss of $(133).Chapel Hill Joint Venture:Chapel Hill Hotel AssociatesThis joint venture is considered to be a VIE, the Company is considered to
be the primary beneficiary and it was created in August 2003 (after January
31, 2003). Therefore, the Company, which owns a 48.78% interest in Chapel
Hill Hotel Associates, LLC, has consolidated the joint ventures results of
operations and balance sheet beginning with the third quarter 2003. For the
three and six months ended June 30, 2004, total revenue of the 14




---



##### 



joint venture was $0 and $2 respectively, total expenses were $55 and $110 respectively,
resulting in a net loss of $(55) and $(108) respectively. As of June 30,
2004, total assets of the joint venture were $9,711, total liabilities were
$5,789, including $4,068 of long term debt, resulting in stockholders
equity totaling $3,922. The Companys share of equity of this joint venture
totaled $1,913 as of June 30, 2004, and its Preferred Contribution (included
in total liabilities) totaled $1,453 as of June 30, 2004.Chapel Hill LesseeThis joint venture is considered to be a VIE, the Company is considered to
be the primary beneficiary and it began operations in May 2004 (after
January 31, 2003). Therefore, the Company has consolidated the joint
ventures results of operations and balance sheet beginning with the second
quarter 2004. The company owns a 48.78% interest in Chapel Hill Lessee
Company, LLC, which will be the lessee of the Courtyard by Marriott in
Chapel Hill, NC, which is expected to open in September 2004. For the three
and six months ended June 30, 2004, total revenue of the joint venture was
$0, total expenses were $9, resulting in a net loss of $(9). As of June 30,
2004, total assets of the joint venture were $4, total liabilities were $12,
resulting in stockholders deficit totaling $(8). The Companys share of
deficit of this joint venture totaled $(4) as of June 30, 2004,Noble Investment Group Mezzanine Loans:In July 2000, the Company provided a $1,080 mezzanine loan for a Hilton
Garden Inn in Atlanta, GA and in February 2001 provided a $2,186 mezzanine
loan for a Hilton Garden Inn in Tampa, FL. Noble Investment Group, Ltd.
(Noble) provided the remainder of the funding and owns and operates the
hotels. These two mezzanine loan arrangements are considered to be
variable interests in the entities that own the hotels, both of which are
VIEs. However, the Company is not considered to be the primary beneficiary.
Therefore, the Company does not consolidate the results of operations of
the hotels for which it has provided financing. The Companys total
outstanding loan balance and related interest receivable exposed to loss as
a result of its involvement in these mezzanine loans totaled $3,266 and
$308, respectively as of June 30, 2004. The Company has received a guaranty
of payment up to $1,300 of the outstanding balance of the mezzanine loan for
the Hilton Garden Inn in Tampa from Noble Investments LLC, an affiliate of
Noble Investments  Tampa, LLC, the borrower.Baltimore, MD Hampton Inn & Suites Mezzanine Loan;In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan to
an unrelated third party owner for the purchase and conversion of a historic
office building into a 116-room Hampton Inn & Suites hotel in Baltimore,
MDs Inner Harbor (the Baltimore Hotel). Subsequently, the Company sold
50 percent of the loan to an affiliate of Hall Financial Group at face
value, or $1,750. This mezzanine loan arrangement is considered to be a
variable interest in the entity that owns the hotel, which is a VIE.
However, the Company is not considered to be the primary beneficiary.
Therefore, the Company does not consolidate the results of operations of the
hotel for which it has provided financing. The Companys total outstanding
loan balance and related interest receivable exposed to loss as a result of
its involvement in this mezzanine loan totaled $1,728 and $346, respectively
as of June 30, 2004.Atlantic Beach, NC Sheraton Loan:In February 2004, the Company issued a $2,400 mezzanine loan to primarily
finance the acquisition of a 200-room Sheraton Hotel in Atlantic Beach, NC.
This mezzanine loan arrangement is considered to be a variable interest in
the entity that owns the hotel, which is a VIE. However, the Company is not
considered to be the primary beneficiary. Therefore, the Company does not consolidate the
results of operations of the hotel for which it has provided financing. The
Companys total outstanding loan balance and related interest receivable
exposed to loss as a result of its involvement in this mezzanine loan
totaled $2,400 and $41, respectively as of June 30, 2004.Cornhusker Square Hotel Loan:In June 2004, the Company and Canyon Capital Realty Advisors (Canyon
Capital), a national lending and real estate investment firm provided a
$16,850 loan to finance the acquisition and major refurbishment and
conversion of the 290-room Cornhusker Square Hotel in Lincoln, NB. Canyon
Capital provided $10,850 as the 15




---



##### 



first, or A piece of the financing, and the
Company provided $6,000 as the second, or B piece. This loan arrangement is
considered to be a variable interest in the entity that owns the hotel,
which is a VIE. However, the Company is not considered to be the primary
beneficiary. Therefore, the Company does not consolidate the results of
operations of the hotel for which it has provided financing. The Companys
total outstanding loan balance and related interest receivable exposed to
loss as a result of its involvement in this mezzanine loan totaled $6,000
and $72, respectively as of June 30, 2004.  10.
    
    CAPITAL STOCKIn February 2004, the Company completed the issuance of 3.68 million shares
of its 8.00% Series B Cumulative Preferred Stock. The net proceeds raised
totaled approximately $88.9 million, approximately $76.1 million of which
was used to fully redeem the Companys then outstanding 3.0 million shares
of 9.25% Series A Cumulative Preferred Stock plus accrued dividends. The
Company used the remaining proceeds of approximately $12.8 million to pay
down its then outstanding balance under the Line, and plans to use the
resulting availability under the Line to fund the Companys hotel lending
business, to acquire hotels or interests in hotels through joint ventures,
and/or for general corporate purposes.The costs capitalized as part of the issuance of the Series A Cumulative
Preferred Stock in September 1997 totaled approximately $1,720 as of
February 2004 and have been recorded as a reduction in net income available
to common shareholders for the six months ended June 30, 2004.11.
    
    DISCONTINUED OPERATIONSThe Company adopted Statement of Financial Accounting Standard No. 144
(SFAS No. 144) effective January 1, 2002 which requires, among other
things, that the operating results of certain real estate assets which have
been sold subsequent to January 1, 2002, or otherwise qualify as held for
disposition (as defined by SFAS No. 144), be included in discontinued
operations in the statements of operations for all periods presented. In
June of 2004, the Company sold its 128-room Hampton Inn in Las Vegas, NV.
In February of 2004, the Company sold its 118-room Hampton Inn in
Wilmington, NC. During 2003, the Companys Board of Directors authorized
management of the Company to sell the Greenville, SC Comfort Inn, which is
classified as held for sale on the Companys Consolidated Balance Sheet as
of June 30, 2004. The property, which is immediately available for sale, is
actively being marketed for sale through a broker. The operating results
for these three hotels are included in discontinued operations in the
statements of operations for the three and six months ended June 30, 2004
and 2003. The Company has not allocated interest expense to the results of
the discontinued operations in accordance with EITF No. 87-24. This change
has resulted in certain reclassifications to the three and six months ended
June 30, 2003 financial statement amounts.Condensed financial information of the results of operations for the three
and six months ended June 30, 2004 and 2003, for the two hotels sold during
2004 and the one hotel classified as held for sale are included in
discontinued operations as follows: 16




---



##### 



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Total revenue
    
    $
    994
    
    
    $
    1,087
    
    
    $
    2,063
    
    
    $
    1,943Total expenses
    
    
    845
    
    
    
    864
    
    
    
    1,801
    
    
    
    1,668Income from operations of discontinued operations
    
    
    149
    
    
    
    223
    
    
    
    262
    
    
    
    275Allocation to minority interest in Partnership  income
from operations of discontinued operations
    
    
    10
    
    
    
    13
    
    
    
    14
    
    
    
    20Gain (loss) on sale of discontinued operations
    
    
    (284
    )
    
    
    
    
    
    
    16
    
    
    
    Allocation to minority interest in Partnership  gain
(loss) on sale of discontinued operations
    
    
    (14
    )
    
    
    
    
    
    
    1
    
    
    
    Loss on impairment of asset held for sale
    
    
    (26
    )
    
    
    
    
    
    
    (50
    )
    
    
    Allocation to minority interest in Partnership  loss on
impairment of asset held for sale
    
    
    (2
    )
    
    
    
    
    
    
    (3
    )
    
    
    Income tax expense (benefit)
    
    
    (61
    )
    
    
    10
    
    
    
    (17
    )
    
    
    (53
    )Income (loss) from discontinued operations
    
    $
    (94
    )
    
    $
    200
    
    
    $
    233
    
    
    $
    308
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations ($ in thousands)
 Overview Winston Hotels, Inc., (the Company) headquartered in Raleigh, North Carolina,
owns hotel properties and interests in hotel properties through joint ventures,
provides loans to the hotel industry and provides hotel development and asset
management services. All of the Companys hotels are operated under franchises
from nationally recognized franchisors including Marriott International, Inc.,
Hilton Hotels Corporation, Six Continents PLC and Choice Hotels International.
The Company conducts substantially all of its operations through its operating
partnership, WINN Limited Partnership, (the Partnership). The Company
operates so as to qualify as a real estate investment trust (REIT) for
federal income tax purposes. The Companys primary source of revenue is room revenue generated from its
hotel ownership interests. The Company also generates revenue through food and
beverage, telephone, parking, and other hotel sales. Operating expenses
consist of the costs to provide these services as well as corporate general and
administrative costs, real and personal property taxes, property and casualty
insurance costs, depreciation, amortization, and other costs. The Company has
significant fixed-costs associated with owning and operating hotels, which do
not necessarily decrease when circumstances such as market factors cause a
reduction in revenue for the property. As a result, changes in revenue per
available room (RevPAR) can result in a greater percentage change in the
Companys earnings and cash flows. The Company seeks to maximize the value of
its portfolio through aggressive asset management, by directing the managers of
its hotels to increase revenues and reduce operating costs, and by completing
selective capital improvements. The Companys primary growth strategies include improving operations at the
hotels in which it holds an ownership interest, acquiring additional hotels or
ownership interests in hotels through joint ventures, and providing loans to
the hotel industry. The following describes the Companys operations and
investments in the first and second quarters of 2004 with respect to each of
these strategies. Improve Hotel Operations
During the second quarter of 2004, the Companys RevPAR increased 7.7 percent
from $54.80 in the second quarter of 2003 to $59.02. Occupancy rates increased
4.9 percent, from 69.7 percent to 73.1 percent, and the average daily rate
(ADR) increased 2.7 percent from $78.66 to $80.78, during the second quarter
of 2004, as compared to the same period of 2003. The Companys gross profit
operating margins decreased to 43.1 percent in the second quarter 17




---



##### 



of 2004 from 43.6 percent in the second quarter of 2003. The Company expects
RevPAR to increase two to four percent in the third quarter of 2004, as
compared to the third quarter of 2003. The Company continues to seek to
maximize hotel revenues and reduce operating costs. The Companys franchisors periodically inspect the Companys hotels to ensure
they meet certain brand standards primarily pertaining to the condition of the
property and its guest service scores. In connection with these routine
reviews, the Company has received default notices from the franchisor for two
of its hotels. The Company is in the process of curing these deficiencies to
comply with the franchisors standards and expects to receive an acceptable
rating for both hotels. Acquisitions During the first quarter of 2004, the Company purchased its joint venture
partners ownership interest in both the Evanston, IL Hilton Garden Inn hotel
and the Windsor, CT Hilton Garden Inn hotel (see Note 8 to consolidated
financial statements). During the first quarter of 2004, the Company, Charlesbank, and New Castle
formed a new joint venture entity, WNC Project Company LLC. The joint venture
purchased the Shelton, CT Ramada Plaza hotel which is currently being renovated
and is expected to be converted to a Courtyard by Marriott during the first
quarter of 2005. The expected total cost of the hotel, after renovations, is
$14,000. Through its investments in joint ventures, the Company also creates
additional income in the form of asset management fees and/or development fees
(see Note 8 to consolidated financial statements). The Company made no acquisitions during the second quarter of 2004. Hotel Financing In February 2004, the Company issued a $2,400 mezzanine loan to partially
finance the acquisition of a 200-room Sheraton hotel in Atlantic Beach, NC.
The hotel has undergone extensive renovations which were substantially
completed by the second quarter of 2004. These hotel loans support the
Companys strategy to provide additional financing to the hotel industry. In June 2004, the Company and Canyon Capital Realty Advisors (Canyon
Capital), a national lending and real estate investment firm, provided a
$16,850 loan to finance the acquisition and major refurbishment and conversion
of the 290-room Cornhusker Square Hotel in Lincoln, NB. Canyon Capital
provided $10,850 as the first, or A piece of the financing, and the Company
provided $6,000 as the second, or B piece. The Companys B piece of the loan
is subordinate to Canyon Capitals A piece. The hotel will remain open during
the renovation and is expected to convert to a full-service Marriott upon
completion. Off-Balance Sheet Arrangements The Companys off-balance sheet arrangements consist primarily of its ownership
interest in its joint venture with Charlesbank Capital Partners, LLC
(Charlesbank). For a further discussion of this joint venture, and its
effect on the Companys financial condition, results of operations and cash
flow, see Critical Accounting Policies  Accounting for Joint Ventures,
Liquidity and Capital Resources, and Note 9 to the consolidated financial
statements, Recent Accounting Pronouncements. Critical Accounting Policies The Companys discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires the Companys management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. 18




---



##### 



The Company believes the following critical accounting policies reflect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. Accounts and Notes Receivable The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its hotel guests, and mezzanine loan borrowers
to make required payments. If the financial condition of its hotel guests,
mezzanine loan borrowers and other borrowers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Accounting for Joint Ventures As of June 30, 2004, the Company had a 15 percent ownership interest in its
Charlesbank joint venture, (which owned an 87 percent ownership interest in the
WCC Project Company LLC joint venture and an 87 percent ownership interest in
the WNC Project Company LLC joint venture, resulting in an indirect 13.05
percent ownership interest by the Company in the four hotels owned by these
joint ventures), a 49 percent ownership interest in its Marsh Landing joint
venture, which owns one hotel, and a 48.78 percent interest in the Chapel Hill
joint venture, which is constructing one hotel. The WCC Project Company LLC
joint venture owns three hotels and the WNC Project Company LLC joint venture
owns one hotel. The Chapel Hill joint venture owns one hotel which is
currently under construction and expected to open in September of 2004. Per the provisions of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), the Company determined that the Charlesbank
joint venture does not have to be consolidated and therefore, the Company used
the equity method to recognize its share of net income or loss from this joint
venture during the three and six months ended June 30, 2004 and adjusted the
carrying value of its investment accordingly. Accordingly, the joint ventures
assets, liabilities, and equity are not recorded on the Companys balance sheet
as of June 30, 2004. The Company determined that the Marsh Landing joint venture is considered to be
a VIE and the Company is considered to be the primary beneficiary. Therefore,
per the provisions of FIN 46, the Company has consolidated the assets and
liabilities of this joint venture into its Consolidated Balance Sheet beginning
as of December 31, 2003, and has consolidated the results of operations
beginning with the first quarter of 2004. The Chapel Hill joint venture was
created in August 2003. Therefore, per FIN 46, the Company has consolidated
the joint ventures assets, liabilities, and results of operations beginning
with the third quarter 2003. Accounting for Long-Lived Assets The Company evaluates the potential impairment of its individual long-lived
assets, principally its wholly owned hotel properties and the hotel properties
in which it owns an interest through joint ventures in accordance with FASB No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets. The
Company records an impairment charge when it believes an investment in hotels
has been impaired, such that the Companys estimate of future undiscounted cash
flows, together with its estimate of an anticipated liquidation amount, would
not recover the then current carrying value of the investment in the hotel
property, or when the Company classifies a property as held for sale and the
carrying value exceeds fair market value. The Company considers many factors
and makes certain subjective assumptions when making this assessment, including
but not limited to, general market and economic conditions, operating results
over the past several years, the performance of similar properties in the same
market and expected future operating results based on a variety of assumptions.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments, thereby possibly requiring an impairment
charge in the future. In addition, if the Companys assumptions regarding
future undiscounted cash flows and anticipated liquidation amounts are
incorrect, a future impairment charge may be required. Further, the Company
currently owns certain hotels for which the carrying value exceeds current
market value. The Company does not believe an impairment charge for these
hotels is appropriate since the Companys forecast of future undiscounted cash
flows, including an anticipated liquidation amount, exceeds the current
carrying value. However, should the Company approve of a plan to sell these
properties, an impairment charge would be required. 19




---



##### 



Income Taxes The Company records a valuation allowance to reduce the deferred tax assets to
an amount that it believes is more likely than not to be realized. Because of
expected future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, the Company has
not recorded a valuation allowance to reduce its deferred tax asset as of June
30, 2004. Should our estimate of future taxable income be less than expected,
or our tax planning strategy not be carried out as planned, we would record an
adjustment to the deferred tax asset in the period such determination was made. Results of Operations Actual Three and Six Months Ended June 30, 2004 versus Actual Three and Six
Months Ended June 30, 2003 REVENUE Room For the three months ended June 30, room revenue increased $3,973 from
$29,284 in 2003 to $33,257 in 2004. On January 1, 2004, per the provisions of
FIN 46, the Company began consolidating the operating results of the Windsor
Hilton Garden Inn; and on March 11, 2004, the Company acquired the lease for
the Secaucus Holiday Inn (collectively the Windsor and Secaucus hotels) and
began recording the operating results of the hotel. Room revenue from these
hotels totaled $2,189 for the three months ended June 30, 2004. In addition,
the increase in room revenues is due, in part, to an increase in RevPAR of 7.7
percent, from $54.80 to $59.02. Occupancy rates increased 4.9 percent, from
69.7 percent to 73.1 percent, and the ADR increased 2.7 percent from $78.66 to
$80.78. For the six months ended June 30, room revenue increased $7,378 from
$55,133 in 2003 to $62,511 in 2004. Additional room revenue from consolidating
the operating results of the Windsor and Secaucus hotels totaled $3,357 for the
six months ended June 30, 2004. In addition, the increase in room revenues is
due, in part, to an increase in RevPAR of 7.7 percent, from $52.01 to $56.04.
Occupancy rates increased 4.8 percent, from 66.8 percent to 70.0 percent, and
the ADR increased 2.8 percent from $77.91 to $80.06. Food and Beverage For the three months ended June 30, food and beverage
revenue increased $458 from $1,961 in 2003 to $2,419 in 2004. For the six
months ended June 30, food and beverage revenue increased $732 from $3,647 in
2003 to $4,379 in 2004. Additional food and beverage revenue from
consolidating the operating results of the Windsor and Secaucus hotels totaled
$405 and $632 for the three and six months ended June 30, 2004, respectively.
The additional increases in food and beverage revenues are due, in part, to
increased occupancy experienced at the Companys full service properties. Other Operating Departments Other operating departments revenue remained
consistent with the prior year period for both the three and six months ended
June 30, 2004. Meeting room rentals increased slightly offset by lower
telephone revenue as cellular phone use continues to reduce the demand for this
service. Percentage Lease Revenue For the three months ended June 30, percentage lease
revenue declined $502 from $511 in 2003 to $9 in 2004. For the six months
ended June 30, percentage lease revenue declined $367 from $1,068 in 2003 to
$701 in 2004. In March 2004, the Company negotiated the transfer of the
long-term lease with Secaucus Holding Corporation, a wholly owned subsidiary of
Prime Hospitality Corp. (Prime), for the Secaucus, NJ Holiday Inn to Barclay.
The Company received a net payment from Prime of $269 as part of the
negotiated settlement. This amount is included in percentage lease revenue in
the accompanying unaudited consolidated statement of operations for the six
months ended June 30, 2004. Alliance manages the hotel. With the transfer of
this lease to Barclay, the Company is no longer the lessor of any hotel leases
with unrelated third parties. Therefore, unless the Company enters into third
party hotel leases as the lessor in the future, the Company will not earn
percentage lease revenue in the future. EXPENSES Rooms For the three months ended June 30, rooms expenses increased $709 from
$6,564 in 2003 to $7,273 in 2004. For the six months ended June 30, rooms
expenses increased $1,246 from $12,639 in 2003 to $13,885 in 20




---



##### 



2004. Additional rooms expense from consolidating the operating results of the
Windsor and Secaucus hotels totaled $482 and $726 for the three and six months
ended June 30, 2004, respectively. The additional increases in rooms expenses
are due, in part, to increases in labor costs and are consistent with the
increases in occupancy for the three and six months ended June 30, 2004 versus
the three and six months ended June 30, 2003. Food and Beverage For the three months ended June 30, food and beverage
expenses increased $340 from $1,411 in 2003 to $1,751 in 2004. For the six
months ended June 30, food and beverage expenses increased $504 from $2,716 in
2003 to $3,220 in 2004. The increases in food and beverage expenses are
consistent with the increases in food and beverage revenues. Property Operating Costs For the three months ended June 30, property
operating costs increased $1,277 from $5,900 in 2003 to $7,177 in 2004. For
the six months ended June 30, property operating costs increased $2,387 from
$11,489 in 2003 to $14,236 in 2004. These costs consist of administrative and
general, sales and marketing, utility and other costs. The increases are
primarily due to increases in administrative and general and sales and
marketing labor costs, printing costs, utility costs, frequent flier program
costs and credit card commissions. Additional property operating costs from
consolidating the operating results of the Windsor and Secaucus hotels totaled
$559 and $955 for the three and six months ended June 30, 2004, respectively. Real Estate Taxes and Property and Casualty Insurance- Real estate taxes and
property insurance costs remained consistent with the prior year period for
both the three and six months ended June 30, 2004. Decreases in insurance
costs were offset by increases in real estate taxes. Franchise Costs-Franchise costs increased consistent with the increase in room
revenues, increasing $276 for the three months ended the June 30, from $2,105
in 2003 to $2,381 in 2004, and $568 for the six months ended June 30, from
$3,916 in 2003 to $4,484 in 2004. Maintenance and Repair Costs For the three months ended June 30, maintenance
and repair costs increased $187 from $1,655 in 2003 to $1,842 in 2004 and for
the six months ended June 30, increased $434 from $3,240 in 2003 to $3,674 in
2004. Additional maintenance and repair costs from consolidating the operating
results of the Windsor and Secaucus hotels totaled $112 and $176 for the three
and six months ended June 30, 2004, respectively. The additional increases are
due, in part, to increases in labor costs and landscaping charges. Management Fees Management fees increased consistent with the increase in
hotel revenues for both the three and six months ended June 30, increasing $167
for the three months ended June 30, from $704 in 2003 to $871 in 2004 and $343
for the six months ended June 30, from $1,252 in 2003 to $1,595 in 2004. General and Administrative For the three months ended June 30, general and
administrative expense increased $38 from $1,470 in 2003 to $1,508 in 2004.
The increase is primarily attributable to an increase in accounting fees,
mainly associated with the Companys efforts to comply with the provisions of
Sarbanes-Oxley Act of 2002, and payroll costs offset by decreases in legal fees
and costs associated with acquisitions and mezzanine loans. For the six months
ended June 30, general and administrative expense increased $183 from $2,957 in
2003 to $3,140 in 2004. The increase is primarily attributable to an increase
in accounting fees, mainly associated with the Companys efforts to comply with
the provisions of Sarbanes-Oxley Act of 2002, NYSE listing fees and payroll
costs offset by decreases in legal fees and costs associated with acquisitions
and mezzanine loans. Depreciation and Amortization For the three and six months ended June 30,
2004 depreciation expense remained consistent with the prior year periods. For
the three and six months ended June 30, 2004 versus comparable periods for
2003, amortization expense increased $110 and $218, respectively, due to the
amortization of costs paid in 2003 to amend the Companys $125 million line of
credit (the Line). Interest and Other Income For the three and six months ended June 30, 2004
versus comparable periods for 2003, interest and other income increased $139
and $175, respectively. The increases are due to additional loan interest 21




---



##### 



income relating to the Atlantic Beach and Cornhusker loans. The Company
continues its efforts to expand its hotel lending program. Interest Expense For the three months ended June 30, interest expense
decreased $240 from $1,913 in 2003 to $1,673 in 2004. The decrease is due to a
decline in weighted average outstanding debt balances for the Line and the
Companys fixed rate loan with GE Capital Corporation, (collectively, the
Corporate Debt Facilities) offset by an increase in the weighted average
interest rates for the Corporate Debt Facilities and the consolidation of the
Evanston, Windsor and Marsh Landing Joint Ventures per FIN 46 beginning with
the first quarter of 2004 of $167. For the three months ended June 30, the
weighted average outstanding debt balance for the Corporate Debt Facilities
decreased from $143,522 in 2003 to $105,428 in 2004, while the weighted average
interest rate for the Corporate Debt Facilities increased from 5.27 percent to
5.65 percent for the same periods. For the six months ended June 30, interest
expense decreased $471 from $3,875 in 2003 to $3,404 in 2004. The decrease is
due to a decline in weighted average outstanding debt balances for the
Corporate Debt Facilities offset by an increase in the weighted average
interest rates for the Corporate Debt Facilities and the consolidation of the
Evanston, Windsor and Marsh Landing Joint Ventures per FIN 46 beginning with
the first quarter of 2004 of $403. The weighted average outstanding debt
balance for the Corporate Debt Facilities decreased from $143,357 for the six
months ended June 30, 2003 to $102,138 for the six months ended June 30, 2004,
while the weighted average interest rate for the Corporate Debt Facilities
increased from 5.38 percent to 5.81 percent for the same periods. The Company
expects interest expense to increase in the third and fourth quarters of this
year due to additional capital investments for acquisitions and hotel loans and
due to expected increases in interest rates. Income Allocation to Minority Interest in Partnership Income allocation to
minority interest in Partnership increased for both the three months and six
months ended June 30, 2004 versus comparable periods for 2003. The increases
are consistent with the increase in net income for the periods offset by a
decrease in minority interest ownership percentage in the Partnership from
6.04% in 2003 to 4.70% in 2004. Income Allocation to Minority Interest in Consolidated Joint Ventures These
amounts represent the minority interest shareholders share of net income of
the consolidated joint ventures. The Company began consolidating the Chapel
Hill joint venture in the third quarter of 2003 and the Ponte Vedra, Evanston
and Windsor joint ventures in the first quarter of 2004 (see Note 8 to
consolidated financial statements regarding the Companys acquisition in 2004
of its partners equity interest in the Windsor and Evanston joint ventures). Income Tax Benefit For the three and six months ended June 30, 2004 and 2003
the income tax benefit is a result of the net loss experienced by Barclay
during the respective periods. The Company expects Barclay to continue to
experience net losses for the remainder of 2004. Discontinued Operations The Company sold the Las Vegas Hampton Inn in June
2004 and sold the Wilmington Hampton Inn in February 2004. The Company
classified the Greenville, SC Comfort Inn as held for sale during the third
quarter of 2003. All capital additions to the Greenville, SC Comfort Inn are
recorded as loss on impairment of asset held for sale, as the Company recorded
an impairment charge in the third quarter of 2003 to reduce this asset to its
estimated fair market value of $2,100. The operating results of the three
properties are shown as discontinued operations in the respective periods. Liquidity and Capital Resources The Company finances its operations from operating cash flow, which was
principally derived from the operations of its hotels. For the six months
ended June 30, 2004 and 2003, cash flow provided by operating activities was
$12,375 and $14,136, respectively. The decrease is primarily due to an
increase in prepaid expenses and other assets, which includes a receivable for
the sale of Las Vegas proceeds, offset by an increase in net income. Under federal income tax law provisions applicable to REITs, the Company is
required to distribute at least 90% of its taxable income to maintain its tax
status as a REIT. During the first two quarters of 2004, the Company declared
distributions of $7,903 to its common shareholders ($0.30 per share) and $3,635
to its preferred shareholders ($0.353 22




---



##### 



per share of Preferred Series A and $0.70 per share of Preferred Series B).
The Company intends to monitor its dividend policy closely and to act
accordingly as results of operations dictate. The Company also intends to fund
cash distributions to shareholders out of cash flow from operating activities.
The Company may incur indebtedness to meet its dividend policy or distribution
requirements imposed on the Company under the Internal Revenue Code (including
the requirement that a REIT distribute to its shareholders annually at least
90% of its taxable income) to the extent that available cash flow from the
Companys investments are insufficient to make such distributions. In February 2004, the Company completed the issuance of 3,680,000 shares of its
8.00% Series B Cumulative Preferred Stock. The net proceeds raised totaled
approximately $88.9 million, approximately $76.1 million of which was used to
fully redeem the Companys then outstanding 3,000,000 shares of 9.25% Series A
Cumulative Preferred Stock plus accrued dividends. The Company used the
remaining proceeds of approximately $12.8 million to pay down its then
outstanding balance under the Line, and plans to use the resulting availability
under the Line to fund the Companys hotel lending business, to acquire hotels
or interests in hotels through joint ventures, and/or for general corporate
purposes and to pay down outstanding debt balances on the Line. The total cost capitalized as part of the issuance of the Series A Cumulative
Preferred Stock in September 1997 totaled approximately $1.7 million as of
February 2004 and was recorded as a reduction in net income available to common
shareholders in the first quarter of 2004. The Companys net cash used in investing activities for the six months ended
June 30, 2004 totaled $17,852. Gross capital expenditures for the Companys
consolidated hotels totaled $11,108. This amount includes capital expenditures
of $5,735 for the Companys wholly owned hotels as of June 30, 2004, and $5,343
for the Companys consolidated joint venture hotels, $5,322 of which was for
the development of the Courtyard by Marriott hotel in Chapel Hill, NC. This
hotel is expected to open in September of 2004. During the first quarter of
2004, the Company purchased its joint venture partners ownership interest in
both the Evanston and Windsor joint ventures. The total purchase price of
$8,162 exceeded the joint venture partners combined equity balance of $6,315.
This additional purchase price was recorded as a capital addition during the
first quarter of 2004. The Company plans to spend approximately $3,300 to renovate certain of its
wholly owned hotels during the remainder of 2004, and an additional $5,200 to
continue to develop the Courtyard by Marriott hotel in Chapel Hill, NC during
the third quarter of 2004. These expected total renovation expenditures for
2004 exceed by approximately $2,700 the 5% of room revenues for its hotels (7%
of room revenues and food and beverage revenues for one of its full-service
hotels) which the Company is required to spend under its percentage leases for
periodic capital improvements and the refurbishment and replacement of
furniture, fixtures and equipment at its wholly owned hotels. These capital
expenditures are funded from operating cash flow, and possibly from borrowings
under the Line, sources that are expected to be adequate to fund such capital
requirements. These capital expenditures are in addition to amounts spent on
normal repairs and maintenance which have approximated 5.9% of room revenues
for each of the six months ended June 30, 2004 and 2003, respectively. During 2003, the Companys Board of Directors authorized management of the
Company to sell the Greenville, SC Comfort Inn, which is classified as held
for sale on the Companys Consolidated Balance Sheet as of June 30, 2004 in
accordance with FASB No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. The property, which is immediately available for sale, is
actively being marketed for sale through a broker. The Company sold the
Wilmington, NC Hampton Inn in February of 2004. The total net proceeds were
$3,350. The Company also sold the Las Vegas, NV Hampton Inn in June of 2004.
The total net proceeds were $7,183. Periodically, the Company considers the
sale of certain other hotels that the Company believes appropriate to sell and
if sold, would use the net sale proceeds for general corporate purposes. Hotel Loans In June 2004, the Company and Canyon Capital Realty Advisors (Canyon
Capital), a national lending and real estate investment firm, provided $16,850
(the Loan) to finance the acquisition and major refurbishment and conversion
of the 290-room Cornhusker Square Hotel in Lincoln, NB. Canyon Capital
provided $10,850 as the first, or A piece of the financing, and the Company
provided $6,000 as the second, or B piece. The Companys B piece of 23




---



##### 



the Loan is subordinate to Canyon Capitals A piece. The hotel will remain
open during the renovation and convert to a full-service Marriott upon
completion. The term of the Loan is 2 years, plus a one-year extension at the
borrowers selection. The Loan plus any accrued interest requires interest
only payments of 10 percent. Canyon Capital is first paid 10.24 percent of the
interest paid on the A piece of the loan with the remainder paid to the
Company. Additional interest of 1.5 percent of the Loan accrues to the Company
until the earlier of prepayment of the Loan or maturity of the Loan. The hotel
is owned 100% by an unaffiliated single purpose entity. The Companys B piece
of the Loan is collateralized by the second interest in the real estate
complex. In February 2004, the Company issued a $2,400 mezzanine loan to partially
finance the acquisition of a 200-room Sheraton hotel in Atlantic Beach, NC.
The hotel has undergone extensive renovations which were substantially
completed by the second quarter of 2004. The term of the loan is 5 years, with
interest only payments that carry an interest rate based on 60-day LIBOR (with
a 2.0% floor) plus 9.00 percent. An additional 2.00 percent per year of the
outstanding principal balance accrues until the earlier of prepayment or
maturity of the loan. The hotel is owned 100% by an unaffiliated single
purpose entity (the Borrower). The Company holds collateral equal to 100% of
the ownership interest in the Borrower. The Company has issued three other hotel loans, a $1,750 loan to partially
finance the 116-room Hampton Inn & Suites in Baltimore, MD, a $1,080 loan to
partially finance the 122-room Hilton Garden Inn in Atlanta, GA and a $2,186
loan to partially finance the 152-room Hilton Garden Inn in Tampa, FL. One of
the Companys primary growth strategies is the issuance of hotel loans to third
party hotel owners. The Company is continually looking for these
opportunities. Joint Ventures The Company currently has entered into four joint venture agreements: The Company owns 49 percent of the Marsh Landing joint venture that owns the
118-room Hampton Inn in Ponte Vedra, FL. The Company owns an indirect 13.05 percent interest in the WCC Project
Company LLC joint venture that owns three hotels, the 102-room Fairfield Inn
& Suites in West Des Moines, IA, the 113-room Courtyard by Marriott in
Beachwood, OH, and the 190-room Springhill Suites by Marriott in Houston,
TX. The Company owns an indirect 13.05 percent interest in the WNC Project
Company LLC joint venture that owns one hotel, the 158-room Ramada Plaza
Hotel in Shelton, CT that is in the process of being renovated and is
expected to be converted to a Courtyard by Marriott during the first quarter
of 2005. The Company owns 48.78 percent of the Chapel Hill joint venture that is
currently constructing a 147-room Courtyard by Marriott in Chapel Hill, NC
that is expected to open in September of 2004. One of the Companys primary growth strategies is the acquisition or
development of additional hotels. The Company is continually looking for
acquisition or development opportunities to either wholly own additional hotels
or to own additional interests in hotels through joint ventures. Under the
terms of the joint ventures, the Company has provided property development and
purchasing services and will continue to provide ongoing asset management
services for additional fees. The Company also receives cash distributions of
the joint ventures operating profits, if any, on a quarterly basis. The
Company has consolidated the results of operations of the Marsh Landing and
Chapel Hill joint ventures for the six months ended June 30, 2004, while the
results of operations of the WCC Project Company and WNC Project Company joint
ventures were not consolidated. See Notes 8 and 9 in Notes to Consolidated
Financial Statements for more information. The Companys net cash provided by financing activities during the six months
ended June 30, 2004 totaled $5,604. This amount included net proceeds of
$88,810 as a result of the issuance of 3,680,000 shares of Series B Preferred
Stock, of which the Company used $75,000 to redeem the 3,000,000 shares of
Series A Preferred stock and $1,059 24




---



##### 



to pay the accrued dividends. The net cash provided by financing activities
for the six months ended June 30, 2004 also included the payment of additional
distributions to shareholders of $10,362, the payment of distributions to the
Partnerships minority interest of $389, the payment of distributions to
consolidated joint ventures minority interest of $569, net long-term debt
payments of $6,330, and a net increase of $10,800 in the outstanding balance
under the Line from $29,200 at December 31, 2003 to $40,000 at June 30, 2004. The Companys availability under the Line totaled approximately $82,000 as of
June 30, 2004. Availability is calculated each quarter on a trailing
twelve-month basis based upon certain valuation criteria contained within the
Line. The Line requires the Company to maintain certain financial ratios
including maximum leverage, minimum interest coverage and minimum fixed charge
coverage, as well as certain levels of unsecured and secured debt and tangible
net worth, all of which the Company was in compliance with as of June 30, 2004.
The failure to comply with any of these covenants would cause a default under
the Line. Furthermore, the Line provides that any default under, or
acceleration of, any of our other debt, any debt of the Partnership or any debt
of our subsidiaries, including any default under its GECC fixed-rate loan or
otherwise, will constitute a default under the Line. Any of these defaults, if
not waived, could result in the acceleration of the indebtedness under the
Line. If this occurs, the Company may not be able to repay its debt or borrow
sufficient funds to refinance it, in which case the Company would not be able
to make distributions to shareholders. The Line bears interest generally at
rates from 30-day LIBOR plus 1.75% to 30-day LIBOR plus 2.50%, based on the
Companys consolidated debt leverage ratio as of the end of each previous
calendar quarter. The Companys interest rate as of June 30, 2004 was 30-day
LIBOR (1.34% as of June 30, 2004) plus 1.75%. The Companys interest rate
beginning July 1, 2004 and for the third quarter remained at 30-day LIBOR plus
1.75%. The Company had $64,304 in debt at June 30, 2004 that was subject to a fixed
interest rate and fixed monthly payments with GE Capital Corporation. This
debt, a ten-year loan with a 25-year amortization period, carries an interest
rate of 7.375%. All unpaid principal and interest payments are due on December
1, 2008. Forty-two of the Companys wholly owned hotels have been pledged as collateral
for the Companys debt securities, 28 against the outstanding balance under the
Line and 14 against the outstanding balance under the GE Capital loan. As of June 30, 2004, the Companys contractual obligations and commitments
(excluding obligations and commitments pursuant to the Companys unconsolidated
joint ventures) were as follows: Payments by PeriodLess Than
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    1 Year
    
    1 - 3 Years
    
    3 - 5 Years
    
    5 YearsContractual ObligationsLong-term debt
    
    $
    76,011
    
    
    $
    1,773
    
    
    $
    3,957
    
    
    $
    59,937
    
    
    $
    10,344Long-term debt of consolidated JVs
    
    
    8,943
    
    
    
    4,149
    
    
    
    184
    
    
    
    219
    
    
    
    4,391Corporate office lease
    
    
    187
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    85,141
    
    
    $
    6,109
    
    
    $
    4,141
    
    
    $
    60,156
    
    
    $
    14,735
 Less Than
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    1 Year
    
    1 - 3 Years
    
    3 - 5 Years
    
    5 YearsOther Commercial CommitmentsLine of credit
    
    
    40,000
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    Total other commercial commitments
    
    $
    40,000
    
    
    $
    40,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
 The Company intends to continue to seek additional hotel loan opportunities and
to acquire and develop additional hotel properties that meet its investment
criteria and is continually evaluating such opportunities. It is expected that
future hotel loans and hotel acquisitions would be financed, in whole or in
part, from additional follow-on common
stock offerings, from borrowings under the Line, through joint venture
agreements, from the net sale proceeds of 25




---



##### 



hotel properties and/or from the
issuance of other debt or equity securities. There can be no assurances that
the Company will make any further hotel loans or any investment in additional
hotel properties, or that any hotel development will be undertaken, or if
commenced, that it will be completed on schedule or on budget. Further, there
can be no assurances that the Company will be able to obtain any additional
financing. Seasonality The hotels operations historically have been seasonal in nature, reflecting
higher occupancy during the second and third quarters. This seasonality can be
expected to cause fluctuations in the Companys quarterly operating profits.
To the extent that cash flow from operations is insufficient during any
quarter, due to temporary or seasonal fluctuations in revenue, the Company
expects to utilize cash on hand or borrowings under the Line to make
distributions to the equity holders. Funds From Operations The Company reports FFO in accordance with the definition of the National
Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as
net income (loss) (determined in accordance with generally accepted accounting
principles, or GAAP), excluding gains (losses) from sales of property, plus
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures (which are calculated to reflect FFO on the
same basis). The Company further subtracts preferred stock dividends from FFO
to calculate FFO available to common shareholders. FFO available to common
shareholders is a performance measure used by the Company in its budgeting and
forecasting models, it is discussed during Board meetings, and is considered
when making decisions regarding acquisitions, sales of properties, and other
investments. Actual results are compared to budget and forecast on a monthly
basis. The calculation of FFO and FFO available to common shareholders may vary
from entity to entity, and as such the presentation of FFO and FFO available to
common shareholders by the Company may not be comparable to other similarly
titled measures of other reporting companies. FFO and FFO available to common
shareholders are not intended to represent cash flows for the period. FFO and
FFO available to common shareholders have not been presented as an alternative
to operating income, and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. FFO is a supplemental industry-wide measure of REIT operating performance, the
definition of which was first proposed by NAREIT in 1991 (and clarified in
1995, 1999 and 2002) in response to perceived drawbacks associated with net
income under GAAP as applied to REITs. Since the introduction of the
definition by NAREIT, the term has come to be widely used by REITs. Historical
cost accounting for real estate assets implicitly assumes that the value of
real estate assets diminishes predictably over time. Since real estate values
instead have historically risen or fallen with market conditions, most industry
investors have considered presentations of operating results for real estate
companies that use historical GAAP cost accounting to be insufficient by
themselves. Accordingly, the Company believes FFO and FFO available to common
shareholders (combined with the companys primary GAAP presentations required
by the SEC) help improve our investors ability to understand the Companys
operating performance. The Company only uses FFO available to common
shareholders as a supplemental measure of operating performance. Shown below
is a reconciliation of net income to FFO and FFO available to common
shareholders. 26




---



##### 



WINSTON HOTELS, INC.
Reconciliation of Net Income to FFO and FFO Available to Common Shareholders
For the Three and Six Months Ended June 30, 2004 and 2003
($ in thousands) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    5,511
    
    
    $
    3,397
    
    
    $
    9,278
    
    
    $
    4,931(Gain) loss on sale of discontinued operations
    
    
    284
    
    
    
    
    
    
    
    (16
    )
    
    
    Minority interest in Partnership allocation
    
    
    185
    
    
    
    94
    
    
    
    181
    
    
    
    74Minority interest in Partnership allocation of (gain)
loss on sale of discontinued operations
    
    
    (14
    )
    
    
    
    
    
    
    1
    
    
    
    Minority interest in Partnership allocation of
earnings from discontinued operations
    
    
    10
    
    
    
    13
    
    
    
    11
    
    
    
    20Depreciation
    
    
    4,309
    
    
    
    4,331
    
    
    
    8,448
    
    
    
    8,831Depreciation from discontinued operations
    
    
    87
    
    
    
    218
    
    
    
    192
    
    
    
    439Depreciation from joint ventures
    
    
    101
    
    
    
    204
    
    
    
    308
    
    
    
    398FFO
    
    
    10,473
    
    
    
    8,257
    
    
    
    18,403
    
    
    
    14,693Preferred stock dividend
    
    
    (1,840
    )
    
    
    (1,734
    )
    
    
    (3,635
    )
    
    
    (3,469
    )Loss on redemption of Series A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    (1,720
    )
    
    
    FFO Available to Common Shareholders
    
    $
    8,633
    
    
    $
    14,780
    
    
    $
    31,451
    
    
    $
    25,917
 Forward Looking Statements This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. You can identify these statements
by use of words like guidance, project, target, may, will, expect,
anticipate, estimate, believes, continue or similar expressions. These
statements represent the Companys judgment and are subject to risks and
uncertainties that could cause actual operating results to differ materially
from those expressed or implied in the forward looking statements, including
but not limited to the following risks: changes in general economic conditions,
properties held for sale will not sell, financing risks including the inability
to obtain financing on favorable terms, if at all, development risks including
the risks of construction delays and cost overruns, lower than expected RevPAR,
occupancy, average daily rates, and gross operating margins, non-issuance or
delay of issuance of governmental permits, zoning restrictions, the increase of
development costs in connection with projects that are not pursued to
completion, non-payment of hotel loans made to third parties, the failure to
make additional hotel loans and investments in non-distressed and distressed
hotel assets, the failure to attract joint venture opportunities and other risk
factors described in Exhibit 99.1 to the Companys Annual Report on Form 10-K
for the year ended December 31, 2003. 
 Item 3  Quantitative and Qualitative Disclosures About Market Risk ($ in thousands)
 As of June 30, 2004, the Companys exposure to market risk for a change in
interest rates related to its debt outstanding under the Line, its debt
outstanding under its permanent loan facility, its debt from consolidated joint
ventures, and its interest receivable from mezzanine loans. Debt outstanding
under the Line totaled $40,000 at June 30, 2004. The Line, which expires in
December 2004, bears interest generally at rates from 30-day LIBOR plus 1.75%
to 30-day LIBOR plus 2.50%, based on the Companys consolidated debt leverage
ratio. The Companys current interest rate is 30-day LIBOR plus 1.75%. On
January 31, 2003, the Company completed an interest rate swap on $50,000 of its
outstanding variable rate debt under the Line. This swap began on March 31,
2003 and 27




---



##### 



matured on February 27, 2004. This transaction effectively replaced
the Companys variable interest rate based on 30-day LIBOR on $50,000 of the
Line with a fixed interest rate of 1.505%. The differential paid or received
on the interest rate swap was recognized as an adjustment to interest expense
over the life of the swap. The weighted average interest rate on the Line for
the six months ended June 30, 2004 was 3.52%. At June 30, 2004, the Company
had $40,000 of variable rate debt outstanding under the Line that was exposed
to fluctuations in the market rate of interest, as compared to $0 of variable
rate debt outstanding under the Line that was exposed to fluctuations in the
market rate of interest as of December 31, 2003. During February 2004, the
Company purchased Regents
ownership interest in the Evanston Hilton Garden Inn and took the property
subject to certain variable rate debt. The debt outstanding under this
permanent loan facility totaled approximately $11,700 at June 30, 2004 and
bears interest at 30-day Libor plus 3.00%. The definitive extent of the Companys interest rate risk under the Line is not
quantifiable or predictable because of the variability of future interest rates
and business financing requirements. If interest rates increased by 100 basis
points, the Companys interest expense for the six months ended June 30, 2004
would have increased by approximately $289, based on the weighted-average
amount of variable rate debt outstanding and exposed to fluctuations in the
market rate of interest. The Company does not enter into derivative or interest
rate transactions for speculative purposes. The following table presents the aggregate maturities of the Companys GE
Capital Corporation fixed rate debt principal and interest rates by maturity
dates at June 30, 2004: Maturity Date
    
    Fixed Rate Debt
    
    Interest Rate2004
    
    $
    1,536
    
    
    
    7.375
    %2005
    
    
    1,653
    
    
    
    7.375
    %2006
    
    
    1,779
    
    
    
    7.375
    %2007
    
    
    1,915
    
    
    
    7.375
    %2008
    
    
    57,421
    
    
    
    7.375
    %Thereafter
    
    
    
    
    
    
    Total
    
    $
    64,304
    
    
    
    7.375
    %
 The following table presents the aggregate maturities of the Companys variable
rate debt principal and interest rates by maturity dates at June 30, 2004: $125 million LOC
    
    $12.3 million Permanent LoanMaturity
    
    Variable
    
    Interest
    
    Variable
    
    InterestDate
    
    Rate Debt
    
    Rate
    
    Rate Debt
    
    Rate
    
    Total2004
    
    $
    40,000
    
    
    Libor + 1.75%
    
    $
    238
    
    
    Libor + 3%
    
    $
    40,2382005
    
    
    
    
    
    
    
    
    
    
    254
    
    
    Libor + 3%
    
    
    2542006
    
    
    
    
    
    
    
    
    
    
    271
    
    
    Libor + 3%
    
    
    2712007
    
    
    
    
    
    
    
    
    
    
    290
    
    
    Libor + 3%
    
    
    2902008
    
    
    
    
    
    
    
    
    
    
    310
    
    
    Libor + 3%
    
    
    310Thereafter
    
    
    
    
    
    
    
    
    
    
    10,344
    
    
    Libor + 3%
    
    
    10,344Total
    
    $
    40,000
    
    
    
    
    
    
    $
    11,707
    
    
    
    
    
    
    $
    51,707
 The following table presents the aggregate maturities of the Companys
consolidated joint ventures variable rate debt principal and interest rates by
maturity dates at June 30, 2004: 28




---



##### 



Marsh Landing Joint Venture
    
    Chapel Hill Joint VentureMaturity
    
    Variable
    
    Interest
    
    Construction
    
    InterestDate
    
    Rate Debt
    
    Rate
    
    Debt
    
    Rate
    
    Total2004
    
    $
    81
    
    
    Libor + 3%
    
    $
    4,068
    
    
    Libor + 3.80%
    
    $
    4,1492005
    
    
    88
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    882006
    
    
    96
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    962007
    
    
    105
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    1052008
    
    
    114
    
    
    Libor + 3%
    
    
    
    
    
    
    
    

    
    
    114Thereafter
    
    
    4,391
    
    
    Libor + 3%
    
    
    
    
    
    
    
    
    
    
    4,391Total
    
    $
    4,875
    
    
    
    
    
    
    $
    4,068
    
    
    
    
    
    
    $
    8,943
 
 Item 4  Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company carried out an evaluation with the participation of the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) as of the end of the period covered by this report.
Based upon that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Companys periodic SEC filings. There has been no change in
the Companys internal control over financial reporting during the quarter
ended June 30, 2004 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 29




---



##### 



PART II  OTHER INFORMATION 
 Item 4. Submission of Matters to Vote of Security Holders On May 4, 2004, the Annual Meeting of Shareholders was held and the
following matters were submitted to the common shareholders for a
vote. There were 23,900,843 shares of Common Stock either present
or evidenced by proxy. Set forth below is a brief description of
the matters voted on and the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes. Proposal 1: Election of Directors: Number ofVotes Against
    
    BrokerName
    
    Votes For
    
    or Withheld
    
    Non-votes
    
    TotalsCharles M. Winston
    
    
    23,361,862
    
    
    
    538,981
    
    
    
    0
    
    
    
    23,900,843Robert W. Winston
    
    
    23,335,828
    
    
    
    565,015
    
    
    
    0
    
    
    
    23,900,843James H. Winston
    
    
    23,268,472
    
    
    
    632,371
    
    
    
    0
    
    
    
    23,900,843Thomas F. Darden
    
    
    23,701,530
    
    
    
    199,313
    
    
    
    0
    
    
    
    23,900,843Richard L. Daugherty
    
    
    23,725,117
    
    
    
    175,726
    
    
    
    0
    
    
    
    23,900,843Edwin B. Borden
    
    
    23,694,523
    
    
    
    206,319
    
    
    
    0
    
    
    
    23,900,843David C. Sullivan
    
    
    23,705,954
    
    
    
    194,889
    
    
    
    0
    
    
    
    23,900,843
 Proposal 2: Ratification of the accounting firm PricewaterhouseCoopers LLP as
external auditors: Votes for:
    
    
    23,722,424Votes against or withheld:
    
    
    138,308Votes abstained:
    
    
    40,111Broker non-votes:
    
    
    0Total
    
    
    23,900,843
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1
    
    
    
    
    
    Certification of Principal Executive Officer of Periodic
Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)31.2
    
    
    
    
    
    Certification of Principal Financial Officer of Periodic
Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)32.1
    
    
    
    
    
    Certification of Robert W. Winston, III, Chief Executive
Officer of Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and dated August 6, 200432.2
    
    
    
    
    
    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 and dated
August 6, 2004
 30




---



##### 



(b
    )
    
    Reports on Form 8-K.The Company filed the following report on Form 8-K during the
quarter ended June 30, 2004:(1
    )
    
    The Company filed a current report on Form 8-K dated
May 5, 2004, pursuant to Item 7 and Item 12 of Form 8-K.
Included in the Form 8-K was the Companys press release
announcing its operating results for the first quarter ended
March 31, 2004, which was attached as Exhibit 99.
 31




---



##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. WINSTON HOTELS, INC.Date August 6, 2004
    
    /s/ Joseph V. GreenJoseph V. GreenPresident and Chief Financial
Officer(Authorized officer and
Principal Financial Officer)
 32




---



##### 



EXHIBIT INDEX Exhibit
    
    Description31.1
    
    Certification of Principal Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a)31.2
    
    Certification of Principal Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a)32.1
    
    Certification of Robert W. Winston, III, Chief Executive Officer of
Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and dated August
6, 200432.2
    
    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 and dated August 6, 2004
 33