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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

EXTENDED STAY AMERICA, INC.
(Exact name of Registrant as specified in its charter)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes ý    No o

        The aggregate market value of the voting stock of the registrant held by stockholders who were not affiliates (as defined by regulations of the Securities and Exchange Commission) of the registrant was approximately $1,085,760,520 at June 30, 2003 (based on the closing sale price on the New York Stock Exchange, Inc. ("NYSE") on June 30, 2003). At March 3, 2004 the registrant had issued and outstanding an aggregate of 98,076,797 shares of common stock.

PART I

ITEM 1.    BUSINESS

Our Company

        We develop, own, and operate extended stay lodging facilities that provide an affordable and attractive lodging alternative at a variety of price points for value-conscious guests. Our facilities are designed to offer a superior product at lower rates than most other lodging providers within their respective price segments. Our facilities feature fully furnished rooms that are generally rented on a weekly basis to guests such as business travelers, professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home. We had revenue of $549.7 million in 2003, an increase of less than 1% from $547.9 million in 2002.

        We believe that extended stay properties generally have higher operating margins, lower occupancy break-even thresholds, and higher returns on capital than traditional hotels, primarily as a result of the typically longer length of stay, lower guest turnover, and lower operating expenses. Of the 4.4 million rooms available in the lodging industry at December 31, 2003, extended stay hotel chains had only approximately 223,000 rooms. Of these 223,000 total extended stay rooms, approximately 134,000 rooms operated in the lower tier segment of the extended stay market, a segment defined by weekly room rates generally below $500 and the segment in which we operate. We had approximately 50,000 rooms (or about 37% of the lower tier segment) at the end of 2003. We believe that strong growth opportunities exist in the lower tier segment of the extended stay market.

        As of December 31, 2003, we owned and operated 472 extended stay lodging facilities and had 11 facilities under construction in a total of 42 states. We currently plan to complete construction on those 11 sites in 2004 and to commence construction on 18 additional sites. We expect to incur total development costs in 2004 of approximately $155 million. At this time, we believe we will be successful in obtaining extensions on a majority of the 22 sites we have under option at December 31, 2003, if needed. We will continue to seek the necessary approvals and permits for these sites and for additional sites. Our future construction plans are limited by the constraints of our amended credit agreement, and are contingent upon a number of factors, including improvements in the overall U.S. economy, improvements in demand for lodging products in the overall lodging industry, and improvements in demand for our extended stay lodging products. Additionally, we continue to evaluate opportunistic acquisitions of other lodging companies or facilities. Our future development and growth plans may also be modified as a result of the Agreement and Plan of Merger entered into on March 5, 2004 with affiliates of The Blackstone Group, as discussed more fully below, and as such, the classification and valuation of certain assets may be modified.

Our Brands

        We own and operate three brands in the extended stay lodging market—StudioPLUS Deluxe Studios®, EXTENDED STAYAMERICA Efficiency Studios®, and Crossland Economy Studios®. Each brand is designed to appeal to different price points generally below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom. StudioPLUS facilities serve the mid-price category and generally feature guest rooms that are larger than those of our other brands, an exercise facility, and a swimming pool. EXTENDED STAY rooms are designed to compete in the economy category. Crossland rooms are typically smaller than EXTENDED STAY rooms and are targeted for the budget category.

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Our Strategy

        Our objective is to be the leading national provider of company owned and managed extended stay lodging facilities. Our goal is to maximize value to customers by providing a superior, consistent, and well-maintained product at each price point while maintaining high operating margins. We attempt to achieve this goal through the following strategies:

        Build Brand Awareness.    We believe that guests value a recognizable brand when selecting lodging accommodations. We believe our increasing national presence, high customer satisfaction, and selective advertising and promotion have established our brands with distinct advantages over their local and regional competitors. We plan to allocate our capital primarily to the EXTENDED STAYAMERICA brand, but we may include additional StudioPLUS and Crossland properties on an opportunistic basis.

        Provide a Superior Product at a Lower Price.    We have designed our facilities to offer a superior product at lower rates than most other lodging providers within their respective price segments. Each of our brands is targeted to a different price point: StudioPLUS—median rate $289 per week (daily equivalent—$41); EXTENDED STAY—median rate $279 per week (daily equivalent—$40); and Crossland—median rate $179 per week (daily equivalent—$26). Room rates at our facilities vary significantly depending upon market factors affecting their locations. These rates contrast with average daily rates in 2003 of $68, $53, and $43 for the mid-price, economy, and budget segments, respectively, of the general lodging industry.

        Achieve Operating Efficiencies.    We believe that the design and price level of our facilities attract guest stays of several weeks. This creates a more stable revenue stream which, together with low cost amenities, leads to reduced administrative and operational costs and higher operating margins. We also use sophisticated control and information systems to manage individual facility-specific factors such as pricing, payroll, and occupancy levels, on a company-wide basis.

        Optimize Low Cost Amenities.    We seek to provide the level of amenities needed to offer quality accommodations while maintaining high operating margins. Our facilities contain a variety of non-labor intensive features that are attractive to extended stay guests. These features include a fully-equipped kitchen or kitchenette, weekly housekeeping, color television with cable or satellite hook-up, coin-operated laundromat, and telephone service with voice mail messaging. Many StudioPLUS facilities also include an exercise room and swimming pool. To help maintain affordability of room rates, labor-intensive services such as daily cleaning, room service, and restaurants are not provided.

        Employ a Standardized Concept.    We have developed standardized plans and specifications for our facilities. This provides for lower construction and purchasing costs and establishes uniform quality and operational standards. We believe the uniformity of our facilities is advantageous when consumers are faced with a variety of lodging options.

        Targeted Expansion.    We continue to expand nationally into regions of the country that contain the demographic factors we think are necessary to support one or more of our facilities. We target sites in markets that generally have high barriers to entry and a large and/or growing population in the surrounding area with a large employment base. These sites also generally have good visibility from a major traffic artery and are in close proximity to convenience stores, restaurants, and shopping centers.

Industry Overview

Traditional Lodging Industry

        The U.S. lodging industry is estimated to have generated approximately $79.4 billion in annual room revenues in 2003 and had approximately 4.4 million rooms at the end of 2003. The U.S. lodging industry's performance has historically been strongly correlated to economic activity. Room supply and

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demand historically have been sensitive to shifts in economic growth, which has resulted in cyclical changes in average daily room and occupancy rates.

        The following table indicates the annual growth in revenue per available room ("REVPAR") and available room nights for 1996 through 2003 for the lodging industry based on data provided by Smith Travel Research.

        Overbuilding in the lodging industry in the mid and late 1980s, when approximately 500,000 rooms were added, resulted in an oversupply of rooms. We believe this oversupply and the general downturn in the economy led to depressed industry performance and a lack of capital available to the industry in the late 1980s and early 1990s. From the early 1990s through 2000, we believe that the lodging industry benefited from an improved supply and demand balance, as evidenced by the compound annual growth rate of 4.9% in REVPAR from 1994 through 2000. REVPARs declined in 2001 and 2002 by (6.9%) and (2.7%), respectively. During 2001, 2002, and 2003, REVPAR was negatively impacted by a recession in the U.S. economy and the adverse effect on travel of the events of September 11, 2001, subsequent terrorism alerts, and the war in Iraq. As a result of continuing concerns about the U.S. economy, the impact of further terrorist events on the travel and leisure industries, and the sustained tightening of credit standards by many financial institutions, we expect the rate of growth of new rooms to continue to moderate for the next few years.

        The lodging industry generally can be segmented by the level of service provided and the pricing of the rooms. Level of service can be divided into the following categories:

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full service hotels, which offer food and beverage services, meeting rooms, room service, and similar guest services;



•

limited service hotels, which generally offer only rooms with amenities such as swimming pools, continental breakfast, or similar limited services; and



•

all-suite hotels, which generally have limited public spaces but provide guests with two rooms or distinct partitioned areas and which may or may not offer food and beverage service to guests.

        The lodging industry may also be segmented by price level and is generally divided into categories based on average daily room rates, which in 2003 were $43 for budget, $53 for economy, $68 for mid-price, $92 for upscale, and $138 for luxury.

        The all-suite segment of the lodging industry is a relatively new segment. It is principally oriented toward business travelers in the mid-price to upscale price levels. All-suite hotels were developed partially in response to the increasing number of corporate relocations, transfers, and temporary assignments and the need of business travelers for more than just a room. To address those needs, all-suite hotels began to offer suites with additional space and, in some cases, an efficiency kitchen. In addition, guests staying for extended periods of time were offered discounts to daily rates when they paid on a weekly or monthly basis. We believe the extended stay market in which we participate is a distinct segment of the traditional lodging industry similar to the all-suite segment.

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Extended Stay Market

        We believe that extended stay hotels generally have higher operating margins, lower occupancy break-even thresholds, and higher returns on capital than traditional hotels. This is primarily a result of the typically longer length of stay, lower guest turnover, and lower operating expenses. Of the 3.7 million rooms available in the lodging industry in 1996, extended stay hotel chains had approximately 60,000 rooms. For 2003, there were 4.4 million rooms available in the lodging industry, of which approximately 223,000 rooms were at extended stay hotel chains. Of these extended stay rooms, approximately 134,000 rooms operated in the lower tier (less than $500 per week) segment of the extended stay market.

        As of December 31, 2003, the inventory of dedicated extended stay rooms, based on data provided by Smith Travel Research, for the following extended stay hotel chains totaled approximately 223,000 rooms.

        We believe that these chains represent the majority of dedicated extended stay rooms available in the U.S. lodging industry.

        An upscale extended stay room generally has a weekly rate of $500 or more, while a lower tier room generally has a weekly rate of less than $500. Our weekly room rates are generally less than $500. Approximately 60% of the supply of extended stay rooms were in the lower tier segment, and we owned approximately 37% of the rooms operated in this segment. The following table indicates the approximate number of total rooms for the extended stay chains listed above, the total rooms for the upscale chains, the total rooms for the lower tier chains, and the total rooms owned by us at the end of each of the last five years.

        As a segment of the total U.S. lodging industry, extended stay hotel chains experienced a significant contraction in the availability of capital that began during 1998 and has continued through 2003. As a result, we expect that the growth in available dedicated extended stay rooms will continue to be moderate for the next few years.

        We believe the continuing significant demand/supply imbalance and the longer average length of stay have caused occupancy rates for extended stay hotels to exceed occupancy rates in the overall U.S. lodging industry. The table below shows that average occupancy rates for extended stay hotel chains

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have exceeded the average occupancy rates in the overall U.S. lodging industry for each of the previous five years, based on data provided by Smith Travel Research.

        We believe the increase in occupancy rates for extended stay hotel chains in 2000 reflects the moderation of additional supply during the year as well as the stabilization of existing supply. We believe that the overall decline in occupancies in 2001 and 2002 reflect the impact of the recession in the U.S. economy and the impact of terrorist events.

Property Development

        Our goal is to be the leading provider of company owned and managed extended stay facilities in the United States. We expect that our primary means of expansion will be the construction and development of new extended stay lodging facilities. We have also acquired, and we may make additional acquisitions of, existing extended stay lodging facilities or other properties that we can convert to the extended stay concept.

        Our strategy is to continue to expand nationally into regions of the country that contain the demographic factors we think are necessary to support one or more of our facilities. We target sites that generally have a large and/or growing population in the surrounding area with a large employment base. These sites also generally have good visibility from a major traffic artery and are in close proximity to convenience stores, restaurants, and shopping centers.

        We have approximately 10 real estate professionals and approximately 22 construction professionals who perform site selection, entitlement, and construction activities according to our established criteria and procedures from offices throughout the United States. It generally takes us at least twenty-four months to identify a site and complete construction of a facility, but this process may be substantially longer in certain markets. We try to minimize our capital outlays incurred in this process until after the commencement of construction.

        The site selection process includes assessing the characteristics of a market area based on our development standards, identifying sites for development within a qualified market area, and negotiating an option to purchase qualified sites. Although the time required to complete the selection process in a market varies significantly based on local market conditions, we typically need approximately six to eight months to assess a market and obtain an option to purchase a site in a qualified market.

        After we obtain an option to purchase a site, our legal, environmental, and business due diligence begins. During this period, our real estate, construction, and legal professionals evaluate whether the site is financially suitable for development, obtain necessary approvals and permits, and negotiate construction contracts with third party general contractors. It generally takes us eight to ten months to complete this process; however, the time needed can vary significantly by market area due to local regulations and restrictions.

        The site selection and due diligence processes are reviewed periodically by our senior management and our approval to begin construction is based on a detailed review of the demographic, physical, and financial qualifications of each site. Once our senior management approves the development of a site, it is purchased, the construction contract is executed, and construction generally begins immediately. We

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use a number of general contractors. The selection of a contractor for a specific site depends upon the geographic area, the negotiated construction costs, and the financial and physical capacities of the contractors. Our construction professionals regularly inspect the construction process to monitor both the quality and timeliness of completion of construction. Although the construction period varies significantly based on local construction requirements and weather conditions, it generally takes us eight to ten months to complete construction once it has begun.

        Our development status as of December 31, 2003 was as follows:

        The design plans for our lodging facilities typically call for a newly-constructed apartment style complex. They generally consist of two- to four-story buildings with laundromat and office areas and primarily use interior corridor building designs, depending primarily on local zoning and weather factors. All three of our brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette with a refrigerator, stovetop, microwave, and sink; and a bathroom. The typical building design criteria for each of our brands is shown in the table below:

        The actual number of rooms and living space per room may vary significantly depending on location and date of construction. In addition, each facility may include certain non-standard room types.

Property Operations

        Each of our facilities employs a property manager who is responsible for the operations of that particular property. The property manager shares duties with and oversees a staff typically consisting of an assistant manager, desk clerks, maintenance personnel, and a housekeeping/laundry staff of approximately 2-10 persons (many of whom are part-time employees). The office at each of our facilities is generally open daily as follows: Crossland—from 7:00 a.m. to 11:00 p.m.; EXTENDED STAY—from 7:00 a.m. to 11:00 p.m.; and StudioPLUS—from 7:00 a.m. to 11:00 p.m., although an employee normally is on duty at all facilities twenty-four hours a day to respond to guests' needs.

        Our property managers make the majority of daily operational decisions. Each property manager is supervised by one of our district managers, who typically is responsible for four to seven facilities, depending on geographic location. Our district managers oversee the performance of our property managers in such areas as guest service, property maintenance, payroll, and cost control. The district managers report to a regional director who is responsible for the supervision of 6 to 8 district managers. Each facility is evaluated against a detailed revenue and expense budget, as well as against the performance of our other facilities. Our corporate offices use sophisticated information systems to support the district managers and regional directors.

        Our facilities are kept up to date through a program of continued maintenance. We do not plan to renovate an entire facility at one time, but rather repair individual parts of each facility on an as needed and ongoing basis. We believe this most effectively ensures that our facilities remain modern

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and in good operating condition. Due to the large number of facilities we opened in certain years, the costs associated with our program of continued maintenance may vary significantly in certain years.

Marketing Strategy

        We believe that guests value a recognizable brand when selecting lodging accommodations. To date, we have created brand awareness primarily by increasing the number of our hotels through a rapid national development program, with sites that typically are in highly-visible locations. We have established a toll free reservation number (1-800-EXT-STAY) and a web site (www.extendedstay.com) to provide information about our locations and to reserve rooms. In addition, our website contains a "Road Warrior" rapid reservation utility for the convenience of our frequent guests. From 1999 through 2002, we conducted a national consumer advertising campaign in USA Today and a national direct mail campaign. Due to reduced occupancies experienced by the overall lodging industry and by our extended stay lodging products in recent quarters as a result of the impact of terrorist events, the war in Iraq, and weakness in the U.S. economy, we suspended both campaigns. However, we intend to conduct a national cable television advertising campaign beginning in the first quarter of 2004 and resume national direct mail campaigns in 2004. Additionally, we intend to utilize the internet more aggressively to generate reservations. We think that we can increase demand for our facilities by building awareness of both the extended stay concept as well as our various brands.

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Lodging Facilities

        As of December 31, 2003, we had 472 extended stay lodging facilities in operation (95 StudioPLUS, 338 EXTENDED STAY, and 39 Crossland) and 11 EXTENDED STAY facilities under construction in a total of 42 states. The average age of our properties at December 31, 2003 was 64 months. The following table shows certain information regarding those facilities.

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Competition

        The lodging industry is highly competitive. This competition is based on a number of factors including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, name recognition, and supply and availability of alternative lodging in local markets, including short-term lease apartments and limited service hotels. All of our facilities are located in developed areas and compete with budget, economy, and mid-price segment hotels and other companies focusing on the extended stay market. The greater the number of competitive lodging facilities in a particular area, the more likely it is that those competitors may have a material adverse effect on the occupancy levels and average weekly room rates of our facilities.

        We expect that competition within the budget, economy, and mid-price segments of the extended stay lodging market will continue to increase. Although we expect the contraction of capital available to the lodging industry that began during 1998 and continued through 2003 to slow the rate of growth of new lodging products in general, we expect our existing competitors to continue to develop extended stay facilities to the extent that their capital permits, and we expect them to increase their development in the event that additional capital should become available in the future. Competitors may include new participants in the lodging industry generally and participants in other segments of the lodging industry that may enter the extended stay market. They may also include existing participants in the extended stay market that may increase their product offerings to include facilities in the budget, economy, or mid-price segments. Competition is for both quality locations to build new facilities and for guests to fill and pay for those facilities. A number of our competitors have greater financial resources than we do and better relationships with lenders and sellers, and may therefore be able to find and develop the best sites before we can. Also, we cannot assure you that our competitors will not reduce their rates, offer greater convenience, services, or amenities, or build new hotels in direct competition with our existing facilities, all of which could have a material adverse effect on our operations.

Environmental Matters

        Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on that property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of those hazardous or toxic substances. Furthermore, a person who arranges for the disposal or transports for disposal or treatment of a hazardous substance at a property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. These costs may be substantial, and the presence of hazardous substances, or the failure to properly remediate hazardous substances, may adversely affect the owner's ability to sell the real estate or to borrow using that real estate as collateral. We may be liable for any of these costs that occur in connection with our properties.

        We have obtained Phase I environmental site assessments ("Phase I Surveys") on our existing properties and we intend to obtain Phase I Surveys before we purchase any future properties. Phase I Surveys are intended to identify potential environmental contamination. A Phase I Survey generally includes a historical review of the relevant property, a review of certain public records, a preliminary investigation of the site and surrounding properties, and the preparation of a written report. A Phase I Survey generally does not include invasive procedures, such as soil sampling or ground water analysis.

        We have also obtained Phase II environmental site assessments ("Phase II Surveys") on a limited number of our existing properties. Phase II Surveys are intended to provide additional information on potential environmental contamination identified in a Phase I Survey. A Phase II Survey generally involves soil sampling and/or groundwater analysis.

        None of our Phase I or Phase II Surveys have revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations, or liquidity, and we

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are not aware of any such liability. With respect to environmental conditions existing at some of our properties, we have obtained a determination from the appropriate federal, state, or local agency that we will not be held liable for those conditions by that agency. This determination, however, does not preclude other agencies or private parties from bringing actions against us based upon those environmental conditions. In certain circumstances, we also have received an indemnification agreement from the previous owner of the property. Despite our customary precautionary and due diligence measures, it is possible that our Phase I and/or Phase II Surveys did not reveal all environmental liabilities or that there are material environmental liabilities or compliance problems of which we are not aware. Moreover, new or changed laws, ordinances, or regulations may impose material environmental liabilities. In addition, the environmental condition of our properties may also be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

Governmental Regulation

        A number of states regulate the licensing of hotels by requiring registration, disclosure statements, and compliance with specific standards of conduct. We believe that each of our facilities has the necessary permits and approvals to operate its respective business, and we intend to continue to obtain these permits and approvals for our new facilities. We are also subject to laws governing our relationship with our employees, including minimum wage requirements, overtime, working conditions, and work permit requirements. An increase in the minimum wage rate, employee benefit costs, or other costs associated with employees could adversely affect our business. There are frequently proposals under consideration, at the federal and state level, to increase the minimum wage.

        Under the Americans With Disabilities Act ("ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. We attempt to satisfy ADA requirements in the designs for our facilities, but we cannot assure you that we will not be subjected to a material ADA claim. If that were to happen, we could be ordered to spend substantial sums to achieve compliance, fines could be imposed against us, and we could be required to pay damage awards to private litigants. The ADA and other regulatory initiatives could adversely affect our business as well as the lodging industry in general.

Insurance

        We currently have the types and amounts of insurance coverage that we consider appropriate for a company in our business. While we believe that our insurance coverage is adequate, our business, results of operations, and financial condition could be materially and adversely affected if we were held liable for amounts exceeding the limits of our insurance coverage or for claims outside of the scope of our insurance coverage.

Employees

        At December 31, 2003, we employed approximately 7,600 persons, of which approximately 5,100 were part-time employees. We expect that we will increase the number of our employees as our business expands. Our employees are not subject to any collective bargaining agreements, and we believe that our relationship with our employees is good.

Recent Developments—The Blackstone Merger Agreement

General

        On March 5, 2004, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with affiliates of The Blackstone Group (collectively, "Blackstone"). Under the Merger Agreement, upon consummation of the merger we will merge with a subsidiary of Blackstone and survive the

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merger as a wholly owned subsidiary of Blackstone. Our Board of Directors unanimously approved the Merger Agreement at a special meeting on March 5, 2004. We expect to complete the merger during the second quarter 2004.

Consideration

        The Merger Agreement provides that upon consummation of the merger, each share of our common stock will be converted into the right to receive $19.625, in cash. In addition, each holder of an option to purchase our common stock from us that is outstanding as of the effective time of the merger and that has an exercise price per share that is less than $19.625 will receive a cash payment equal to the product of (1) the difference between $19.625 and the applicable exercise price of the option and (2) the aggregate number of shares issuable upon exercise of the option.

Conditions

        Consummation of the merger is subject to customary closing conditions and certain other conditions, including:

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the approval of the Merger Agreement by the holders of a majority of our outstanding common shares;



•

the absence of certain severe market disruption events that would prevent Blackstone from obtaining the $2.662 billion in acquisition debt financing contemplated by the Merger Agreement; and



•

our receipt of tender and consent of at least 51% of each series of our outstanding 9.15% Senior Subordinated Notes due 2008 and 9.875% Senior Subordinated Notes due 2011, in connection with the related tender offers and consent solicitations for those securities.

Termination

        Either Blackstone or we may terminate the Merger Agreement if the merger is not consummated on or before August 31, 2004. The Merger Agreement may also be terminated for a number of other reasons, including if our Board of Directors determines in good faith that its fiduciary duties require it to withdraw or modify its recommendation of the Merger Agreement to our stockholders for various reasons. In the event the Merger Agreement is terminated, we would be required to pay Blackstone up to $50,000,000 as a termination fee under certain circumstances, and Blackstone would be required to pay us $50,000,000 as a termination fee under certain other circumstances.

Further Information

        For more details regarding the proposed merger, please refer to the copy of the Merger Agreement that we filed with the SEC on March 8, 2004 as Exhibit 99.1 to our Current Report on Form 8-K. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement.

ITEM 2.    PROPERTIES

        In addition to our lodging facilities described in "Item 1. Business—Lodging Facilities" above, we maintain regional offices throughout the United States and our corporate headquarters in Spartanburg, SC. In 2003, we completed construction of our new corporate headquarters and executive offices, totaling approximately 118,000 square feet, located in Spartanburg, SC. Except for our corporate headquarters, we generally rent our office space on a short-term basis. Our offices are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional office space, as needed, on terms acceptable to us.

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ITEM 3.    LEGAL PROCEEDINGS

        On August 5, 2002, one of our subsidiaries was served with a complaint against us and several of our subsidiaries in the Superior Court of California, County of Alameda. This action alleges violations of certain of California's wage and hour laws. In particular, the action alleges that we misclassified former and existing managers, assistant managers, and manager trainees for our properties in California as exempt from California's laws regarding overtime pay. In January 2004, the plaintiffs filed a motion to certify the lawsuit as a class action representing all such property managers in California. We will oppose the motion. The plaintiffs are seeking an injunction, and damages for back pay, penalties, interest, and attorneys' fees. The case is captioned Rachelle Reid, et al vs. Extended Stay America, Inc., etc., et al. We believe we have meritorious defenses against this claim and intend to defend this case vigorously. The financial impact, if any, of this case cannot yet be predicted.

        In addition to the litigation noted above, we are from time to time subject to various other claims and lawsuits incidental to our business. In the opinion of management, these claims and suits, in the aggregate, will not have a material adverse effect on our consolidated financial statements.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
               MATTERS

        Our common stock is traded on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "ESA." On December 31, 2003, the last reported sale price of our common stock on the NYSE was $14.48 per share. At December 31, 2003, there were approximately 271 record holders of our common stock. The table below sets forth the high and low sales prices of shares of our common stock on the NYSE for the periods indicated.

Market Information

        In October 2003, our Board of Directors declared our first quarterly cash dividend, of $0.04 per share of our common stock, which was paid in November 2003. A second quarterly dividend of $0.04 per share of our common stock was declared in January 2004 and paid in February 2004. Our dividend policy is impacted by, among other items, our operating results, cash flow, and the need to retain much of our cash for continued growth. In addition, our credit facility and senior subordinated notes contain limitations on our ability to pay cash dividends or repurchase our common stock that permit us to pay up to $20 million in cash dividends annually and to repurchase up to an aggregate of $35 million of our common stock during the term of our credit facility.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following selected financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

(1)

Excludes interest of $10.2 million, $10.9 million, $10.4 million, $5.5 million, and $4.7 million for 1999, 2000, 2001, 2002, and 2003, respectively, capitalized during the construction of our facilities under Statement of Financial Accounting Standards ("SFAS") Statement No. 34 "Capitalization of Interest Cost."

(2)

Average occupancy rates are determined by dividing the rooms occupied on a daily basis by the total number of rooms. Due to our rapid expansion, our overall average occupancy rate for 1999 was negatively impacted by the lower occupancy typically experienced during the pre-stabilization period for newly opened facilities. Our overall occupancy rate for 2001, 2002, and 2003 was negatively impacted by a general decline in demand for

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lodging products as a result of the weakened U.S. economy and the impact on travel associated with the events of September 11, 2001, subsequent terrorism alerts, and the war in Iraq.

(3)

Weighted average rooms available is calculated by dividing total room nights available during the year by the number of days in the year.

(4)

EBITDA, as defined herein, represents earnings before cumulative effect of an accounting change, loss on debt extinguishment, interest, income taxes, depreciation, and amortization. EBITDA is provided because it is commonly used in the lodging and real estate industries as a measure of liquidity and as a means of determining the value of a company or cash producing properties. EBITDA is not a measurement of financial performance under generally accepted accounting principles and not necessarily comparable with similarly titled measures for other companies. EBITDA is reconciled to net cash provided by operating activities, the most comparable measure under generally accepted accounting principles, as follows (in thousands):

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

General

        Extended Stay America, Inc. was organized on January 9, 1995 as a Delaware corporation. We own and operate three brands in the extended stay lodging market—StudioPLUS Deluxe Studios®, EXTENDED STAYAMERICA Efficiency Studios®, and Crossland Economy Studios®. Each brand is designed to appeal to different price points generally below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom. StudioPLUS facilities serve the mid-price category and generally feature guest rooms that are larger than those in our other brands, an exercise facility, and a swimming pool. EXTENDED STAY rooms are designed to compete in the economy category. Crossland rooms are typically smaller than EXTENDED STAY rooms and are targeted for the budget category.

        The table below provides a summary of our selected development and operational results for 2001, 2002, and 2003.

        Average occupancy rates are determined by dividing the number of rooms occupied on a daily basis by the total number of rooms. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates generally will be greater than standard room rates because of (1) stays of less than one week, which are charged at a higher nightly rate, (2) higher weekly rates for rooms that are larger than the standard rooms, and (3) additional charges for more than one person per room. Occupancy and room rates for each of our brands are affected by a number of factors, including the impact of the U.S. economy on demand for lodging products, the amount of competing lodging products in markets where we operate, and the number and geographic location of our new facilities. We cannot assure you that we can maintain our occupancy and room rates.

        At December 31, 2003, we had 472 operating facilities (39 Crossland, 338 EXTENDED STAY, and 95 StudioPLUS) and had 11 EXTENDED STAY facilities under construction. We expect to complete the construction of the facilities currently under construction generally within the next twelve months; however, we cannot assure you that we will complete construction within the time periods we have historically experienced. Our ability to complete construction may be materially impacted by various factors including final permitting, obtaining certificates of occupancy, and weather-related construction delays.

        On March 5, 2004, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with affiliates of The Blackstone Group (collectively, "Blackstone"). Under the Merger Agreement, upon consummation of the merger we will merge with a subsidiary of Blackstone and survive the merger as a wholly owned subsidiary of Blackstone. Our Board of Directors unanimously approved the Merger Agreement at a special meeting on March 5, 2004. We expect to complete the merger during the second quarter 2004.

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Results of Operations

2003 Compared to 2002

Property Operations

        Operating results for the year ended December 31, 2002 include the impact of one-time rental contracts during the 2002 Winter Olympics at three EXTENDED STAY properties located in Salt Lake City, Utah (the "Olympic Properties"). We estimate that these contracts generated additional non-recurring net income of approximately $1.2 million, or $0.01 per diluted share, for the year ended December 31, 2002.

        We realized average occupancy of 65% and an average weekly room rate of $325 for the year ended December 31, 2003, and, including the Olympic Properties, we realized average occupancies of 68% and average weekly room rates of $321 for the year ended December 31, 2002. This resulted in a decrease of 3.4% in overall REVPAR for 2003 when compared to 2002.

        Excluding the Olympic Properties, the following is a summary of the number of properties in operation at the end of each year along with the related average occupancy rates and average weekly room rates during each year:

        Excluding the Olympic Properties, we realized an overall decrease of 3.0% in REVPAR for 2003 when compared to 2002. Excluding the Olympic Properties, our overall REVPAR decreased 2.8%, 3.9%, 3.8%, and 1.1% in the first, second, third, and fourth quarters of 2003, respectively, when compared to the same periods in the prior year. The decrease in overall average occupancy rates for 2003 compared to 2002 reflects, primarily, the impact of a general decline in demand for lodging products as a result of the weakened U.S. economy and the war in Iraq. The increase in overall average weekly room rates for 2003 compared to 2002 is due to increases in rates charged in previously opened properties and, particularly for the EXTENDED STAY brand, the geographic dispersion of properties opened since December 31, 2002 and the higher standard weekly room rates in certain of those markets. In addition, the higher overall average weekly room rate for the EXTENDED STAY brand, relative to the Studio PLUS brand, reflects a larger concentration for the EXTENDED STAY brand in higher cost markets with generally higher standard weekly rates.

        Comparable hotels, consisting of the 389 properties opened for at least one year at the beginning of the first quarter of 2002 (excluding the Olympic Properties), realized the following percentage changes in the components of REVPAR for 2003 when compared with 2002:

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        We believe that the percentage changes in the components of REVPAR for our brands differ primarily as a result of the number and geographic dispersion of the comparable hotels.

        The percentage change in the components of REVPAR for our comparable hotels experienced in 2003 reflects a decrease in REVPAR of 4.9%, 5.7%, 4.5%, and 1.6% in the first, second, third, and fourth quarters of 2003, respectively, when compared to the same periods in the prior year. While we believe that improvements in the U.S. economy will result in increased demand for our products, it is difficult to estimate the timing and magnitude of these improvements.

        We recognized total revenue of $549.7 million in 2003 and $547.9 million in 2002. This is an increase of $1.8 million, or less than 1%. The 431 properties that we owned and operated throughout both periods experienced an aggregate decrease in revenue of approximately $22.9 million, net of incremental revenue at the Olympic Properties of approximately $2.0 million.

        Property operating expenses, consisting of all expenses directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation, and interest were $273.6 million (50% of total revenue) for 2003, as compared to $252.4 million (46% of total revenue) for 2002. We did not incur significant incremental property operating expenses at the Olympic Properties during 2002. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to REVPAR increases or decreases because the majority of these expenses do not vary based on REVPAR. We realized an overall decrease of 3.4% in REVPAR for 2003 as compared to 2002, and our property operating margins were 50% for 2003 and 54% for 2002.

        As a lodging facility ages, scheduled maintenance and replacement costs for that property generally increase. We capitalize new construction costs, major renewals, and improvements, but expense repairs, maintenance, and replacements as those costs are incurred. Major renewals and improvements consist of new expenditures for equipment not included in the original construction, while repairs, maintenance, and replacements include, among other items, expenditures to replace case goods, lighting fixtures, flooring, furnishings, and HVAC equipment ("Refurbishment Expenditures"). Approximately one-half of the decrease in the property operating margin percentage experienced during 2003 compared to 2002 is attributable to an increase in Refurbishment Expenditures. In 2002, we recorded as part of property operating expenses $17.6 million in Refurbishment Expenditures, which represented 3.2% of revenue. In 2003, we recorded Refurbishment Expenditures of $29.3 million. In 2004, we anticipate Refurbishment Expenditures of approximately $40 million. The increase in these expenses is primarily attributable to our practice of significantly refurbishing properties approaching six to seven years old. We opened 230 properties during 1997 and 1998, and we expect to complete the refurbishment of a majority of these properties during 2004. Subsequent to 2004, the number of our properties approaching six to seven years of age declines, and we anticipate Refurbishment Expenditures will begin to return to more historical levels.

        The provisions for depreciation and amortization for our lodging facilities were $79.4 million for 2003 and $78.1 million for 2002. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These provisions reflect a pro rata allocation of the annual depreciation and amortization charge for the periods for which the facilities were in operation. Depreciation and amortization for 2003 increased compared to 2002 because we operated 17 additional facilities in 2003 and because we operated for a full year the 24 properties that were opened in 2002.

        From time to time, we may incur expenses due to defects in materials, construction, or systems installed in our properties. Most significant products or systems contain manufacturers' warranties. In addition, contractual agreements with our general contractors typically require general contractors and subcontractors to maintain insurance designed to cover the faulty installation of significant systems.

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        Testing has revealed that certain of our properties have sustained damage arising from defective materials and/or faulty installation of the Exterior Insulation Finish System ("EIFS"). At this time, the full extent of damage cannot reasonably be estimated, although currently we do not believe the cost of repairs will be material to us overall. We have 44 active lawsuits that we filed against the EIFS manufacturers, certain applicators, certain general contractors, and others, seeking necessary repairs and recovery rights against expected and incurred expenses. At this time, the extent of recovery, if any, on these suits cannot reasonably be determined.

Corporate Operations

        Corporate operating and property management expenses include all expenses not directly related to the development or operation of lodging facilities. These expenses consist primarily of personnel, administrative, and certain marketing costs, as well as development costs that are not directly related to a site that we will develop. We incurred corporate operating and property management expenses of $51.2 million (9% of total revenue) in 2003 and $48.8 million (9% of total revenue) in 2002. The increase in the amount of these expenses for 2003 as compared to 2002 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated. We expect these expenses will continue to increase as we develop, market, and operate additional facilities in the future.

        Depreciation and amortization was $1.0 million for 2003 and $742,000 for 2002. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These assets were primarily office furniture and equipment.

        We realized $267,000 of interest income during 2003 and $721,000 of interest income during 2002. This interest income was primarily attributable to the temporary investment of excess funds. We incurred interest charges of $83.2 million during 2003 and $85.4 million during 2002. Of these amounts, $4.7 million during 2003 and $5.5 million during 2002 was capitalized and included in the cost of buildings and improvements.

        Our effective income tax rate for 2002 decreased from 40.0% to 39.0%, reflecting a reduction in estimated state income taxes resulting from state tax planning and credits. Accordingly, the provision for income taxes in the first quarter of 2002 reflected a reduction in expense of approximately $3.0 million associated with adjusting our deferred tax assets and liabilities to reflect the lower rate. The $3.0 million reduction in tax expense and the decrease in our effective rate during 2002 resulted in the recognition of income tax expense of $25.8 million and $31.6 million (39.0% and 35.6%, respectively, of income before income taxes and cumulative effect of an accounting change) for 2003 and 2002, respectively. Our effective income tax rate remained 39% for 2003. Our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes.

Results of Operations

2002 Compared to 2001

Property Operations

        Operating results for the year ended December 31, 2002 include the impact of one-time rental contracts during the 2002 Winter Olympics at the three Olympic Properties. We estimate that these contracts generated additional non-recurring net income of approximately $1.2 million, or $0.01 per diluted share, for the year ended December 31, 2002.

        Including the Olympic Properties, we realized average occupancies of 68% and average weekly room rates of $321 for the year ended December 31, 2002, and we realized average occupancies of 74% and average weekly room rates of $320 for the year ended December 31, 2001, resulting in a decrease of 7.5% in overall REVPAR for 2002 when compared to 2001.

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        Excluding the Olympic Properties, the following is a summary of the number of properties in operation at the end of each year along with the related average occupancy rates and average weekly room rates during each year:

        Excluding the Olympic Properties, we realized an overall decrease of 7.8% in REVPAR for 2002 when compared to 2001. Excluding the Olympic Properties, our overall REVPAR decreased 16.7%, 10.0%, 4.0%, and 0.1% in the first, second, third, and fourth quarters of 2002, respectively, when compared to the same periods in the prior year. The decrease in overall average occupancy rates for 2002 compared to 2001 reflects, primarily, the impact of a general decline in demand for lodging products as a result of the weakened U.S. economy and the continued impact on travel of the events of September 11, 2001 and subsequent terrorism alerts. Although overall average weekly room rates for 2002 compared to 2001 did not change, we generally experienced decreases in rates charged in previously opened properties. Particularly for the EXTENDED STAY brand, this decrease in rates was offset by the geographic dispersion of properties opened since December 31, 2001 and the higher standard weekly room rates in certain of those markets.

        Comparable hotels, consisting of the 359 properties opened for at least one year at the beginning of the first quarter of 2001 (excluding the Olympic Properties), realized the following percentage changes in the components of REVPAR for 2002 when compared with 2001:

        We believe that the percentage changes in the components of REVPAR for our brands differ primarily as a result of the number and geographic dispersion of the comparable hotels.

        The percentage change in the components of REVPAR for our comparable hotels experienced in 2002 reflects a decrease in REVPAR of 17.2%, 11.0%, 5.9%, and 2.6% in the first, second, third, and fourth quarters of 2002, respectively, when compared to the same periods in the prior year.

        We recognized total revenue of $547.9 million in 2002 and $541.5 million in 2001. This is an increase of $6.4 million, or 1%. The 392 properties that we owned and operated throughout both periods experienced an aggregate decrease in revenue of approximately $49.0 million, net of incremental revenue at the Olympic Properties of approximately $2.0 million.

        Property operating expenses, consisting of all expenses directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation, and interest were $252.4 million (46% of total revenue) for 2002, as compared to $230.2 million (43% of total revenue) for 2001. We did not incur significant incremental property operating expenses at the Olympic Properties during 2002. We realized an overall decrease of 7.5% in

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REVPAR for 2002 as compared to 2001, and our property operating margins were 54% for 2002 and 57% for 2001.

        The provisions for depreciation and amortization for our lodging facilities were $78.1 million for 2002 and $71.1 million for 2001. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These provisions reflect a pro rata allocation of the annual depreciation and amortization charge for the periods for which the facilities were in operation. Depreciation and amortization for 2002 increased compared to 2001 because we operated 24 additional facilities in 2002 and because we operated for a full year the 39 properties that were opened in 2001.

Corporate Operations

        We incurred corporate operating and property management expenses of $48.8 million (9% of total revenue) in 2002 and $47.5 million (9% of total revenue) in 2001. The increase in the amount of these expenses for 2002 as compared to 2001 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated.

        Depreciation and amortization was $742,000 for 2002 and $1.0 million for 2001. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These assets were primarily office furniture and equipment.

        We realized $721,000 of interest income during 2002 and $509,000 of interest income during 2001. This interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $85.4 million during 2002 and $86.9 million during 2001. Of these amounts, $5.5 million during 2002 and $10.4 million during 2001 was capitalized and included in the cost of buildings and improvements.

        Our effective income tax rate for 2002 decreased from 40.0% to 39.0%, reflecting a reduction in estimated state income taxes resulting from state tax planning and credits. Accordingly, the provision for income taxes in the first quarter of 2002 reflected a reduction in expense of approximately $3.0 million associated with adjusting our deferred tax assets and liabilities to reflect the lower rate. The $3.0 million reduction in tax expense and the decrease in our effective rate during 2002 resulted in the recognition of income tax expense of $31.6 million and $38.7 million (35.6% and 40.0%, respectively, of income before income taxes, and cumulative effect of an accounting change) for 2002 and 2001, respectively. Excluding the impact of our effective income tax rate decrease, our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes.

Liquidity and Capital Resources

        We had net cash and cash equivalents of $16.0 million as of December 31, 2003 and $6.6 million as of December 31, 2002. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. We invested excess funds during these periods in an overnight sweep account with a commercial bank, which in turn invested these funds in short-term, interest-bearing reverse repurchase agreements. Due to the short-term nature of these investments, we did not take possession of the securities, which were instead held by the financial institutions. The market value of the securities held pursuant to these arrangements approximates the carrying amount.

        Net cash provided by operating activities amounted to $145.8 million during 2003, $164.0 million during 2002, and $176.9 million during 2001.

        Net cash used for investment activities associated with acquiring land, developing sites, and constructing and furnishing new hotels amounted to $127.5 million in 2003, $193.3 million in 2002, and $311.9 million in 2001.

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        Our cost to develop a property varies significantly by brand and by geographic location due to differences in land and labor costs. Similarly, the average weekly rate charged and the cash flow from these properties will vary significantly, but generally are expected to be in proportion to the development costs. For the 422 properties we opened from January 1, 1996 through December 31, 2002, the average development cost was approximately $5.9 million with an average of 107 rooms. However, since January 1, 2000, we have opened a number of properties in the Northeast and West, where average development costs are higher. Accordingly, the average development cost per property for the 110 properties we opened from January 1, 2000 through December 31, 2003 was $8.1 million. We plan to continue to develop properties in the Northeast and West and expect overall average development costs to be approximately $8.9 million per property in 2004.

        We did not repurchase any shares of our Common Stock during 2003 or 2002. We received net proceeds from the exercise of options to purchase Common Stock totaling $31.0 million in 2003, $6.6 million in 2002, and $19.8 million in 2001.

        In July 2001, we entered into an agreement with various banks establishing $900 million in credit facilities (the "Credit Facility") that provide for revolving loans and term loans on a senior collateralized basis. The proceeds of the Credit Facility may be used for general corporate purposes and to retire existing indebtedness under our previously existing credit agreement. The Credit Facility also provides for up to an additional $250 million in uncommitted facilities.

        In connection with the termination of our previously existing credit facility, we incurred a loss on debt extinguishment of $9.9 million, associated with the write-off of unamortized debt issue costs during 2001.

        Loans under the Credit Facility bear interest, at our option, at either a prime-based rate or a LIBOR-based rate plus an applicable margin. In addition, the commitment fee on the unused revolving facility is 0.5% per annum. The following table illustrates the amounts committed under the Credit Facility, their final maturities, and the interest on loans made under the Credit Facility, subject to the terms of the amendments discussed below:

        The Credit Facility was amended to provide additional flexibility for future development as well as flexibility in response to continued economic uncertainty. The amendments modified certain definitions and established a total leverage covenant (defined as the ratio of our consolidated debt to our consolidated EBITDA, each as defined in the Credit Facility documents) of 5.50 for the period from July 1, 2003 to June 30, 2005, 5.25 for the period from July 1, 2005 to June 30, 2006, and 5.00 for the period from July 1, 2006 and thereafter. Pursuant to the amendments, the Applicable Margin (as defined in the Credit Agreement, as amended) for the Revolver and A Term Loans is determined each quarter based on a Consolidated Leverage Ratio-based pricing grid. Under the pricing grid, if the Consolidated Leverage Ratio is less than 4.25:1.00, the Applicable Margin for the Revolver and A Term Loans (the "Margin") is 2.25% for LIBOR Loans and 1.25% for Prime Rate Loans. If the Consolidated Leverage Ratio is less than 4.75:1.00 but greater than or equal to 4.25:1.00, the Margin is 2.50% for LIBOR Loans and 1.50% for Prime Rate Loans. If the Consolidated Leverage Ratio is less than 5.00:1.00 but greater than or equal to 4.75:1.00, the Margin is 3.00% for LIBOR Loans and 2.00% for Prime Rate Loans. If the Consolidated Leverage Ratio exceeds 5.00:1.00, the Margin is 3.25% for

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LIBOR Loans and 2.25% for Prime Rate Loans. At December 31, 2004, the Company experienced a Consolidated Leverage Ratio, for pricing purposes, of 5.04. As such, the Margin will increase to 3.25% for LIBOR Loans and 2.25% for Prime Rate Loans in April 2004 in conjunction with delivery of certain compliance certificates as required by the Credit Agreement. The amendments also permit us to pay up to $20 million in cash dividends annually and to repurchase up to an aggregate of $35 million of our common stock during the term of the Credit Facility.

        At December 31, 2003, we had no outstanding loans under the $200 million revolving facility and $631.6 million, net of principal repayments, outstanding under the term loans, leaving $198 million available and committed under the Credit Facility. In January 2002, we borrowed $100 million pursuant to the delayed draw A-3 term loan. The proceeds of this borrowing were used to repay amounts outstanding under the revolving facility and for working capital purposes. In order to minimize interest rates charged under the Credit Facility, we prepaid $25 million in March 2002.

        The loans under the Credit Facility will mature on the dates set forth in the table above. The A-1, A-2, and A-3 term loans will be amortized in quarterly installments of varying amounts through July 24, 2007, and the B term loan will be subject to principal payments of 1% of the initial loan amounts in each of the first six years following the closing date with the remaining principal balance to be repaid during the seventh year. Availability of the revolving facility is dependent, however, upon us satisfying certain financial ratios of debt and interest compared to earnings before interest, taxes, depreciation, and amortization, with these amounts being calculated pursuant to definitions contained in the Credit Facility documents, as amended.

        As of December 31, 2003, we had $1.5 million in outstanding letters of credit. These letters of credit are being maintained as security for construction related performance and, in certain circumstances, may be required to be maintained through October 2006. Outstanding letters of credit reduce the amount of availability under the Credit Facility. Additionally, any draws against the letters of credit may be funded from the revolving facility.

        We are required to repay indebtedness outstanding under the Credit Facility with the net cash proceeds from certain sales of our, and our subsidiaries', assets, from issuances of debt by us or our subsidiaries, and from insurance recovery events (subject to certain reinvestment rights). We are also required to repay indebtedness outstanding under the Credit Facility annually in an amount equal to 50% of our excess cash flow, as calculated pursuant to the Credit Facility.

        Our obligations under the Credit Facility are guaranteed by each of our subsidiaries. The Credit Facility is also collateralized by a first priority lien on all stock of our subsidiaries and all other current and future assets owned by us and our subsidiaries (other than mortgages on real property).

        The Credit Facility contains a number of negative covenants, including, among others, covenants that limit our ability under certain circumstances to incur debt, make investments, pay dividends, prepay other indebtedness, engage in transactions with affiliates, enter into sale-leaseback transactions, create liens, make capital expenditures, acquire or dispose of assets, or engage in mergers or acquisitions. In addition, the Credit Facility contains affirmative covenants, including, among others, covenants that require us to maintain our corporate existence, comply with laws, maintain our properties and insurance, and deliver financial and other information to the lenders. The Credit Facility also requires us to comply with certain financial tests on a consolidated basis, including a maximum total leverage ratio, a maximum senior leverage ratio, and a minimum interest coverage ratio.

        Failure to satisfy any of the covenants constitutes an event of default under the Credit Facility, notwithstanding our ability to meet our debt service obligations. The loan documentation includes other customary and usual events of default for these types of credit facilities, including without limitation, an event of default if a change of control occurs. Upon the occurrence of an event of default, the lenders

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have the ability to accelerate all amounts then outstanding under the Credit Facility and to foreclose on the collateral. We were in compliance with all covenants during 2003 and at December 31, 2003.

        Our primary market risk exposures result from the variable nature of the interest rates on borrowings under the Credit Facility. We entered into the Credit Facility for purposes other than trading or speculation. Based on the levels of borrowings under the Credit Facility at December 31, 2003, if interest rates changed by 1.0%, our annual cash flow and net income would change by $3.9 million. We manage our market risk exposures by periodic evaluation of such exposures relative to the costs of reducing the exposures, by entering into interest rate swaps, or by refinancing the underlying obligations with longer term fixed rate debt obligations. We do not own derivative financial instruments or derivative commodity instruments.

        In March 1998, we issued $200 million aggregate principal amount of senior subordinated notes (the "2008 Notes"). The 2008 Notes bear interest at an annual rate of 9.15%, payable semiannually on March 15 and September 15 of each year and mature on March 15, 2008. We may redeem the 2008 Notes beginning on March 15, 2003. The initial redemption price is 104.575% of their principal amount, plus accrued interest. The redemption price declines each year after 2003 and is 100% of their principal amount, plus accrued interest, after 2006.

        In June 2001, we issued $300 million aggregate principal amount of senior subordinated notes (the "2011 Notes" and together with the 2008 Notes, the "Notes"). The net proceeds on the 2011 Notes were used to reduce amounts outstanding under a previously existing credit facility. The 2011 Notes bear interest at an annual rate of 9.875%, payable semiannually on June 15 and December 15 of each year and mature on June 15, 2011. We may redeem the 2011 Notes beginning on June 15, 2006. The initial redemption price is 104.938% of their principal amount, plus accrued interest. The redemption price declines each year after 2006 and is 100% of their principal amount, plus accrued interest, beginning June 15, 2009. In addition, before June 15, 2004, we may redeem up to $105 million of the 2011 Notes at 109.875% of their principal amount plus accrued interest, using the proceeds from sales of certain kinds of our capital stock.

        The 2011 Notes are pari passu with the 2008 Notes. The Notes are not collateralized and are subordinated to our senior indebtedness, including the Credit Facility. The Notes contain certain covenants for the benefit of the holders. These covenants, among other things, limit our ability under certain circumstances to incur additional indebtedness, pay dividends, and make investments and other restricted payments, enter into transactions with our 5% stockholders or affiliates, create liens, and sell assets.

        In connection with the Credit Facility and the Notes, we incurred additions to deferred loan costs of $2.3 million during 2003, $2.2 million during 2002, and $21.5 million during 2001.

        At December 31, 2003, we had 11 sites under construction with total development costs of approximately $96 million. We currently plan to complete construction on those 11 sites in 2004 and to commence construction on 18 additional sites. We expect to incur total development costs in 2004 of approximately $155 million. At this time, we believe we will be successful in obtaining extensions on a majority of the 22 sites we have under option at December 31, 2003, if needed. We will continue to seek the necessary approvals and permits for these sites and for additional sites. Our future construction plans are limited by the constraints of our amended Credit Facility and are contingent upon a number of factors, including improvements in the overall U.S. economy, improvements in demand for lodging products in the overall lodging industry, and improvements in demand for our extended stay lodging products. Our future development and growth plans may also be modified as a result of the Agreement and Plan of Merger entered into March 5, 2004 with affiliates of The Blackstone Group, and as such, the classification and valuation of certain assets may be modified.

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        At December 31, 2003, we had commitments under cancelable construction contracts not reflected in our financial statements totaling approximately $53 million to complete construction of extended stay properties. We believe that the remaining availability under the Credit Facility, together with our cash on hand and cash flows from operations, will provide sufficient funds to continue our expansion as presently planned and to fund our operating expenses, including our working capital deficit, for the next twelve months. We may increase our capital expenditures and property openings in future years, in which case our capital needs will increase. We may also need additional capital depending on a number of factors, including the number of properties we construct or acquire, the timing of that development, the cash flow generated by our properties, the amount of cash dividends we may pay on our common stock, and the amount of open market repurchases we make of our Common Stock. Also, if capital markets provide favorable opportunities, our plans or assumptions change or prove to be inaccurate, our existing sources of funds prove to be insufficient to fund our growth and operations, or if we consummate acquisitions, we may seek additional capital sooner than currently anticipated. In the event we obtain additional capital, we may seek to increase property openings in future years. Sources of capital may include public or private debt or equity financing. We cannot assure you that we will be able to obtain additional financing on acceptable terms, if at all. Our failure to raise additional capital could result in the delay or abandonment of some or all of our development and expansion plans, and could have a material adverse effect on us.

        The following table provides a summary of the impact our contractual obligations are expected to have on our future liquidity (in thousands):

(1)

Represents payment obligations under our Credit Facility and the Notes.

(2)

Represents payment obligations associated with leases of real property.

Off-Balance Sheet Arrangements

        We currently have no "off-balance sheet arrangements" that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

Application of Critical Accounting Policies

        In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. SFAS No. 144 requires that if the sum of the future cash flows expected to result from a company's long-lived assets, undiscounted and without interest charges, is less than the reported value of those assets, an asset impairment must be recognized in the financial statements. The amount of impairment to recognize is calculated by subtracting the fair value of the assets from the reported value of the assets.

        We believe that the accounting estimate related to asset impairment is a "critical accounting estimate" because: (1) it is highly susceptible to change from period to period because it requires us to make assumptions about future revenues and expenses over the estimated useful life of our long-lived assets; and (2) the impact that recognizing an impairment would have on the assets reported on our

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balance sheet as well as our net income may be material. Our assumptions about future revenues and expenses require significant judgment because actual revenues and operating expenses have fluctuated in the past and are expected to continue to do so. We have discussed the development and selection of this critical accounting estimate with the audit committee of our board of directors, and the audit committee has reviewed our related disclosure.

        In estimating future revenues and expenses, we may consider local market conditions, recent industry REVPAR trends, our recent REVPAR trends, economic forecasts, estimated changes in operating costs, budgets, and other factors.

        We analyzed our long-lived assets for impairment for the years ended December 31, 2003, 2002, and 2001 and determined there were no events or changes in circumstances indicating the carrying amount of our long-lived assets may not be recoverable. Accordingly, no impairment charges were recognized for the years ended December 31, 2003, 2002, or 2001.

        Depending on the size of an impairment loss, if any, our liquidity and capital resources may be affected in the future.

New Accounting Releases

        In December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46-R ("FIN 46-R"), "Consolidation of Variable Interest Entities," to expand upon and strengthen existing accounting guidance that addresses when a company should include the assets, liabilities, and activities of another entity in its financial statements. To improve financial reporting by companies involved with variable interest entities (more commonly referred to as special-purpose entities or off-balance sheet structures), FIN 46-R requires that a variable interest entity be consolidated by a company if that company is subject to a majority risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Prior to FIN 46-R, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The consolidation requirements of FIN 46-R apply immediately to variable interest entities created after January 31, 2003, and to older entities in the first fiscal year or interim period beginning after December 15, 2003. The adoption of this interpretation did not have a material effect on our financial statements.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which is effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. SFAS No. 149 amends and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of this statement did not have a material effect on our financial statements.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of this statement did not have a material effect on our financial statements.

Seasonality and Inflation

        Based upon the operating history of our facilities, we believe that extended stay lodging facilities are not as seasonal in nature as those in the overall lodging industry. We do expect, however, that our occupancy rates and revenues will be lower than average during the first and fourth quarters of each

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calendar year. Because many of our expenses do not fluctuate with changes in occupancy rates, declines in occupancy rates may cause fluctuations or decreases in our quarterly earnings.

        The rate of inflation as measured by changes in the average consumer price index has not had a material effect on our revenue or operating results during any of the periods presented. We cannot assure you, however, that inflation will not affect our future operating or construction costs.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K includes forward-looking statements. We use the terms "expects", "intends", "plans", "projects", "believes", "estimates", and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. However, these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause our actual results, performance, or achievements to be materially different. These factors include, among other things:

•

uncertainty as to changes in U.S. general economic activity and the impact of these changes on the consumer demand for lodging products in general and for extended stay lodging products in particular;



•

increasing competition in the extended stay lodging market;



•

our ability to increase or maintain revenue and profitability in our new and mature properties;



•

uncertainty as to the impact on the lodging industry of terrorist attacks, responses to terrorist attacks, or any epidemic or similar health-related matters;



•

uncertainty as to our future profitability;



•

our ability to operate within the limitations imposed by financing arrangements;



•

our ability to meet construction and development schedules and budgets;



•

our ability to obtain financing on acceptable terms to finance our growth;



•

the risk of significant one-time or continuing expenses due to defects in materials, construction, or systems installed throughout many of our properties;



•

our ability to integrate and successfully operate any properties acquired in the future and the risks associated with these properties; and



•

our ability to develop and implement the operational and financial systems needed to manage rapidly growing operations.

        Other matters set forth in this Annual Report may also cause our actual future results to differ materially from these forward-looking statements. We cannot assure you that our expectations will prove to be correct. In addition, all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements mentioned above. You should not place undue reliance on these forward-looking statements. All of these forward-looking statements are based on our expectations as of the date of this Annual Report. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

        Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website (www.extendedstay.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC.

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Information included on our website is not considered part of this filing. A copy of our Code of Ethics for Senior Financial Officers is also available free of charge through our website.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

*****

INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Extended Stay America, Inc.

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Extended Stay America, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 1 to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivatives.

PRICEWATERHOUSECOOPERS LLP

Spartanburg, South Carolina
February 27, 2004, except as
to Note 11 which is as of
March 5, 2004

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EXTENDED STAY AMERICA, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

See notes to consolidated financial statements.

31

EXTENDED STAY AMERICA, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

See notes to consolidated financial statements.

32

EXTENDED STAY AMERICA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)