Annual Report (Form 10-K), fiscal year 1994

ITEM 1.
BUSINESS
GENERAL
Unless otherwise specified, information regarding Meditrust's business is given as of February 28, 1995.
Meditrust (the "Company"), a real estate investment trust organized on August 6, 1985, invests primarily in the health care industry in locations throughout the United States. The objective of the Company is to enable shareholders to participate in the investment in health care related facilities held primarily for the production of income to be distributed to shareholders. In meeting this objective, the Company invests in high quality facilities that are managed by experienced operators and achieves diversity in its property portfolio by sector of the health care industry, geographic location, operator and form of investment.
The Company was organized to qualify, and intends to continue to operate, as a real estate investment trust in accordance with federal tax laws and regulations. So long as the Company so complies, with limited exceptions, the Company will not be taxed under federal income tax laws on that portion of its taxable income that it distributes to its shareholders. The Company has distributed, and intends to continue to distribute, substantially all of its real estate investment trust taxable income to shareholders.
As of February 28, 1995, the Company has investments in 278 facilities, consisting of 234 long-term care facilities, 23 rehabilitation hospitals, two alcohol and substance abuse treatment facilities, six psychiatric hospitals, six retirement living centers, six medical office buildings and one acute care hospital. Included in the 278 facilities are ten properties under construction that are expected to be completed during the next three to twelve months. The Company's investments take the form of permanent mortgage loans, sale/leaseback transactions and development loans. The Company only enters into development loans if, upon completion of the facility, the Company's development loan is to be replaced by either a permanent mortgage loan from the Company or a sale/leaseback transaction with the Company.
The Company's gross real estate investments increased by $262,545,000 during 1994 to $1,550,147,000 at December 31, 1994 as a result of the Company making permanent mortgage loans and development loans and entering into sale/leaseback transactions.
Permanent Mortgage Loans. During 1994, the Company provided permanent mortgage financing of $221,903,000 for 68 long-term care facilities and one retirement living facility located in Texas, Massachusetts, Florida, Ohio, Indiana, Missouri, Nebraska and California and refinanced for $50,500,000 an existing mortgage with a balance of $32,836,000 secured by 28 long-term care facilities located in Illinois and refinanced for $5,765,000 an existing mortgage with a balance of $4,246,000 collateralized by a long-term care facility in Connecticut.
Sale/Leaseback Transactions. The Company acquired for $18,327,000 three long-term care facilities located in Connecticut, one long-term care facility located in Massachusetts and one long-term care facility located in New York and provided $545,000 for additions to four facilities located in Michigan, New Hampshire, New York and Washington currently owned by the Company. The Company also acquired for $11,570,000 a long-term care facility located in Massachusetts which was substituted for a long-term care facility located in Connecticut with a mortgage balance of $10,232,000.
Other Transactions. In June 1994, The Mediplex Group, Inc. ("Mediplex") became a wholly-owned subsidiary of Sun Healthcare Group, Inc. ("Sun"). The merged entities comprise approximately 24% of the Company's portfolio of gross real estate investments as of December 31, 1994. A condition of the Company's consent to this merger was the extension of all existing Mediplex lease and mortgage terms to between 2004 and 2008 and the addition of annual rate escalators.
In connection with this transaction, the Company (a) terminated its leases with Mediplex on three properties (two alcohol and substance abuse treatment facilities and one psychiatric hospital located in New York) with a net book value of $101,537,000 and replaced these leases with mortgages from Sun totaling $74,000,000, (b) loaned $11,000,000 to Sun which was collateralized by a mortgage on a rehabilitation facility located in Colorado and (c) entered into sale/leaseback transactions with Sun totaling $30,000,000 for two rehabilitation facilities located in Kentucky and Massachusetts and for a long-term care facility located in Connecticut. This transaction resulted in a deferred gain of $13,463,000 currently being recognized over a ten-year period.
Also during 1994, the Company received principal payments on real estate mortgages of $5,149,000 and proceeds of $18,321,000 from the prepayment of mortgage loans on a retirement living facility located in Texas and two long-term care facilities located in Connecticut. In addition, the Company received proceeds of $4,000,000 from the sale of a long-term care facility in Texas.
Conversion of Development Loans to Permanent Mortgage Loans. During 1994, the Company provided ongoing development financing of $2,326,000 resulting in an aggregate funding of $5,600,000 for a long-term care facility located in Utah.
Development Loans. During 1994, the Company provided net construction financing of $47,615,000 for six long-term care facilities under construction and for six medical office buildings under construction and for additions to three existing long-term care facilities. As of February 28, 1995, the Company is committed to providing additional financing of approximately $20,493,000 for the completion of ten facilities.
Financings. In March 1994, the Company issued $90,000,000 of 7 1/2% convertible debentures due 2001. The Company used the net proceeds to repay short-term borrowings.
In October 1994, the Company completed the sale of 4,500,000 Shares at $30.875 per Share. The net proceeds were used to repay short-term borrowings and for investments in additional health care facilities.
The Company may raise additional capital from public or private sources and invest in additional health care related facilities.
INVESTMENT AND OTHER POLICIES
GENERAL
The Company invests in income-producing health care related facilities which may include long-term care facilities, rehabilitation hospitals, alcohol and substance abuse treatment facilities, psychiatric hospitals, retirement living facilities, medical office buildings and other health care related facilities. These investments are made primarily for the production of income. Because the Company invests in health care related facilities, the Company is not in a position to diversify its investment portfolio to include assets selected to reduce the risks associated with investment in improved real estate in a single industry. However, the Company intends to continue to diversify its portfolio by broadening its geographic base, providing financing to more operators, diversifying the type of health care facilities in its portfolio and diversifying the types of financing methods provided.
In evaluating potential investments, the Company considers such factors as: (1) the current and anticipated cash flow and its adequacy to meet operational needs and other obligations and to provide a competitive market return on equity to the Company's shareholders; (2) the geographic area, type of property and demographic profile; (3) the location, construction quality, condition and design of the property; (4) the potential for capital appreciation, if any; (5) the growth, tax and regulatory environment of the communities in which the properties are located; (6) occupancy and demand for similar health care facilities in the same or nearby communities; (7) an adequate mix of private and governmental-sponsored patients; (8) potential alternative uses of the facilities; and (9) prospects of liquidity through financing or refinancing.
Management conducts market research and analysis for all potential investments on behalf of the Company. Management also reviews the value of the property, the interest rates and debt service coverage requirements of any debt to be assumed and the anticipated sources of repayment for such debt.
The Company's Declaration of Trust places no limitations on the percentage of the Company's total assets that may be invested in any one property or joint venture or on the nature or identity of the operators of such properties. The independent Trustees of the Company, however, may establish such limitations as they deem appropriate from time to time.
From time to time, the Company enters into senior debt transactions. The Company has no current plans to underwrite securities of other issuers. The Company has authority to offer shares of beneficial interest ("Shares") in exchange for investments which conform to its standards and to repurchase or otherwise acquire its Shares or other securities. The Company has no present plans to invest in the securities of others for the purpose of exercising control, although the Company owns interests in partnerships which own health care facilities. The Company makes loans on such terms as the Trustees may approve.
The Company will not, without the prior approval of a majority of Trustees, including a majority of the independent Trustees of the Company, acquire from or sell to any Trustee, director, officer or employee of the Company, or any affiliate thereof, any of the assets or other property of the Company.
The Company provides its shareholders with annual reports containing audited financial statements and quarterly reports containing unaudited financial information.
REINVESTMENT OF SALES PROCEEDS
In the event the Company sells or otherwise disposes of any of its properties, the independent Trustees will determine whether and to what extent the Company will acquire additional properties or distribute the proceeds to the shareholders.
SHORT-TERM INVESTMENTS
The Company invests its cash in certain short-term investments during interim periods between the receipt of revenues and distributions to shareholders. Cash not invested in facilities may be invested in interest-bearing bank accounts, certificates of deposit, short-term money-market securities, short-term United States government securities, mortgage-backed securities guaranteed by the Government National Mortgage Association, mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration, mortgage loans, mortgage loan participations, and certain other similar investments. The Company's ability to make certain of these investments may be limited by tax considerations. The Company's return on these short-term investments may be more or less than its return on real estate investments.
BORROWING POLICIES
The Company may incur additional indebtedness when, in the opinion of the Trustees, it is advisable. For short-term purposes, the Company may, from time to time, negotiate lines of credit, arrange for other short-term borrowings from banks or others or issue commercial paper. The Company may arrange for long-term borrowing from banks, insurance companies, public offerings or private placements to institutional investors. Under the Company's Declaration of Trust and under documents pertaining to certain existing indebtedness, the Company is subject to various restrictions with respect to borrowings. See "Prohibited Investments and Activities."
In addition, the Company may incur mortgage indebtedness on real estate which it has acquired through purchase, foreclosure or otherwise. When terms are deemed favorable, the Company may invest in properties subject to existing loans or mortgages. The Company also may obtain financing for unleveraged properties in which it has invested or may refinance properties acquired on a leveraged basis. There is no limitation on the number or amount of mortgages which may be placed on any one property, but overall restrictions on mortgage indebtedness are provided under documents pertaining to certain existing indebtedness.
PROHIBITED INVESTMENTS AND ACTIVITIES
The Declaration of Trust prohibits the Company from engaging in any investment practices or activities that would disqualify the Company as a real estate investment trust under the provisions of the Internal Revenue Code.
In addition to prohibitions and restrictions imposed by the Declaration of Trust, there are and may be, from time to time, additional restrictions imposed by debt instruments or other agreements entered into by the Company.
POLICY CHANGES
The Declaration of Trust may not be changed by the Trustees without shareholder approval. All other policies set forth herein may be changed by the Trustees without shareholder approval.
COMPETITION
The Company competes, primarily on the basis of price, knowledge of the industry, and flexibility of financing structure, with real estate partnerships, other real estate investment trusts, banks and other investors generally in the acquisition, leasing and financing of health care related facilities.
The operators of the facilities compete on a local and regional basis with other operators of comparable facilities. They compete with independent operators as well as companies managing multiple facilities, some of which are substantially larger and have greater resources than the operators of the Company's facilities. Some of these facilities are operated for profit while others are owned by governmental agencies or tax-exempt not-for-profit organizations.
EMPLOYEES
As of December 31, 1994, the operations of the Company were maintained by 34 employees. The Company has not experienced any significant labor problems and believes that its employee relations are good.
DECLARATION OF TRUST
The Declaration of Trust of the Company provides that shareholders of the Company shall not be subject to any liability for the acts or obligations of the Company and that, as far as is practicable, each written agreement of the Company is to contain a provision to that effect. No personal liability will attach to the shareholders for claims under any contract containing such a provision in writing where adequate notice is given of such provision, except possibly in a few jurisdictions. With respect to all types of claims in such jurisdictions and with respect to tort claims, contract claims where the shareholder liability is not disavowed as described above, claims for taxes and certain statutory liabilities in other jurisdictions, a shareholder may be held personally liable to the extent that claims are not satisfied by the Company. However, the Declaration of Trust provides that, upon payment of any such liability, the shareholder will be entitled to reimbursement from the general assets of the Company. The Trustees intend to conduct the operations of the Company, with the advice of counsel, in such a way as to avoid, as far as is practicable, the ultimate liability of the shareholders of the Company. The Trustees do not intend to provide insurance covering such risks to the shareholders.
GOVERNMENT REGULATION
The amount of percentage rent or additional interest, if any, which generally is based on the health care facility operator's gross revenues, is in most cases subject to changes in the reimbursement and licensure policies of federal, state and local governments. In addition, the acquisition of health care facilities is generally subject to state and local regulatory approval.
MEDICARE, MEDICAID, BLUE CROSS AND OTHER PAYORS
Certain of the operators receive payments for patient care from federal Medicare programs for elderly and disabled patients, state Medicaid programs for medically indigent and cash grant patients, private insurance carriers, employers and Blue Cross plans, health maintenance organizations, preferred provider organizations and directly from patients. In general, Medicare payments for psychiatric care, long-term care services and rehabilitative care are based on allowable costs plus a return on equity for proprietary facilities. Payments from state Medicaid programs for psychiatric care are based on reasonable costs or are at fixed rates. Long-term care facilities are generally paid by the Medicaid programs at fixed rates. Most Medicare and Medicaid payments are below retail rates. Blue Cross payments in different states and areas are based on costs, negotiated rates or retail rates.
LONG-TERM CARE FACILITIES
Regulation of long-term care facilities is exercised primarily through the licensing of such facilities. The particular agency having regulatory authority and the license qualification standards vary from state to state and, in some instances, from locality to locality. Licensure standards are constantly under review and undergo periodic revision. Governmental authorities generally have the power to review the character, competence and community standing of the operator and the financial resources and adequacy of the facility, including its plant, equipment, personnel and standards of medical care. Long-term care facilities are certified under the Medicare program and all are eligible to qualify under state Medicaid programs, although not all participate in the Medicaid programs.
REHABILITATION HOSPITALS
Rehabilitation hospitals are also subject to extensive federal, state and local legislation and regulation. Rehabilitation hospitals are subject to periodic inspections and licensure requirements. Inpatient rehabilitation facilities are cost-reimbursed, receiving the lower of reasonable costs or reasonable charges. Typically, the fiscal intermediary pays a set rate per day based on the prior year's costs for each facility. Annual cost reports are filed with the operator's fiscal intermediary and adjustments are made, if necessary.
ALCOHOL AND SUBSTANCE ABUSE TREATMENT FACILITIES
Alcohol and substance abuse treatment facilities must comply with the licensing requirements of federal, state and local health agencies and with the requirements of municipal building codes, health codes and local fire departments. In granting and renewing a facility's license, a state health agency considers, among other things, the physical buildings and equipment, the qualifications of the administrative personnel and health care staff, the quality of nursing and other services and the continuing compliance of such facility with the laws and regulations applicable to its operations.
PSYCHIATRIC HOSPITALS
Psychiatric hospitals generally are subject to extensive federal, state and local legislation and regulation. Licensing for psychiatric hospitals is subject to periodic inspections regarding standards of medical care, equipment and hygiene. In addition, there are specific laws regulating civil commitment of patients and disclosure of information regarding patients being treated for chemical dependency. Many states have adopted a "patient's bill of rights" which sets forth standards, such as using the least restrictive treatment, allowing patient access to the telephone and mail, allowing the patient to see a lawyer and
requiring the patient to be treated with dignity. Insurance reimbursement for psychiatric treatment generally is more limited than for general health care.
MEDICAL OFFICE BUILDINGS
The individual physicians, groups of physicians and health care providers which occupy medical office buildings are subject to a variety of federal, state and local regulations applicable to their specific areas of practice. Since medical office buildings may contain numerous types of medical services, a wide variety of regulations may apply. In addition, medical office buildings must comply with the requirements of municipal building codes, health codes and local fire departments.
ACUTE CARE HOSPITALS
Acute care hospitals are subject to extensive federal, state and local legislation and regulation relating to among other things the adequacy of medical care, equipment, personnel, hygiene, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Hospitals must maintain strict standards in order to obtain their state hospital licenses from a department of health or other applicable agency in each state. In granting and renewing licenses, a department of health considers, among other things, the physical buildings and equipment, the qualifications of the administrative personnel and nursing staff, the quality of care and continuing compliance with the laws and regulations relating to the operation of the facilities. State licensing of facilities is a prerequisite to certification under the Medicare and Medicaid programs. Various other licenses and permits also are required in order to dispense narcotics, operate pharmacies, handle radioactive materials and operate certain equipment. Hospital facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for their licensing and accreditation.
ITEM 2.



ITEM 2.
PROPERTIES
The table sets forth certain information as of February 28, 1995 regarding the Company's facilities:
(1) Based upon information provided by the operators of the facilities, the average occupancy of the Company's facilities for the year ended December 31, 1994, was as follows: long-term care facilities, 87%; rehabilitation hospitals, 62%; alcohol and substance abuse treatment facilities, 69%; psychiatric hospitals, 44%; retirement living facilities, 95%. Generally, average occupancy rates are determined by dividing the number of patient days in each period by the average number of licensed bed days during such period.
(2) Represents purchase price or mortgage amount at December 31, 1994 for operating facilities and the estimated construction loan amount for facilities under construction. The annual base rentals/interest payments under the leases or mortgages are generally projected to be 10.0% - 12.5% of the purchase price or mortgage amount, in accordance with the terms of the respective agreements.
(3) Base rent excludes additional and percentage rent and interest but includes an aggregate of $6,765,000 in debt service. Additional and percentage rent and interest for the year ended December 31, 1994 was an aggregate of $8,156,000 for all of the facilities. Additional and percentage rent and interest are calculated based upon a percentage of a facility's revenues over an agreed upon base amount or an automatic annual escalation.
(4) Permanent mortgage loans.
(5) Includes a permanent mortgage loan of $7,231,000.
(6) Includes permanent mortgage loans aggregating $44,698,000 and a construction loan of $4,735,000.
(7) Includes a permanent mortgage loan of $8,388,000
(8) Includes a permanent mortgage loan of $50,248,000.
(9) Includes permanent mortgage loans of $115,652,000 and construction loans of $33,298,000.
(10) Includes permanent mortgage loans of $20,886,000.
(11) Includes a permanent mortgage loan of $3,358,000.
(12) Includes a permanent mortgage loan of $9,563,000.
(13) Includes a permanent mortgage loan of $29,398,000.
(14) Represents mortgages collateralized by multi-state facilities.
(15) Represents a permanent mortgage on sixteen properties located in nine states: Washington (2), North Carolina (1), Tennessee (2), Nebraska (2), Indiana (5), Florida (1), Kansas (1), Colorado (1) and Missouri (1).
(16) Represents a permanent mortgage on eighteen properties located in ten states:
Arizona (4), Colorado (2), Florida (1), Georgia (1), Idaho (1), Indiana (2), Kansas (1), Tennessee (4), Utah (1) and California (1).
(17) Represents a permanent mortgage on seven properties located in three states: Florida (5), Ohio (1) and Indiana (1).
(18) Represents a permanent mortgage on nine properties located in two states: Missouri (8) and Texas (1).
(19) Development loans.
(20) Investments by the Company in facilities operated by Sun Healthcare Group, Inc., Life Care Centers of America, Inc., Continental Medical Systems, Inc., Springwood/Chur Associates, Health Asset Realty Trust, and Geriatric and Medical Centers, Inc., represented 22.3%, 18.2%, 7.9%, 7.7%, 6.2% and 5.0%, respectively, of the Company's total portfolio as of February 28, 1995.
Long-Term Care Facilities. The long-term care facilities offer restorative, rehabilitative and custodial nursing care for patients not requiring more extensive and sophisticated treatment available at acute care hospitals. The facilities are designed to provide custodial care and to supplement hospital care and many have transfer agreements with one or more acute care hospitals.
Rehabilitation Hospitals. The rehabilitation hospitals provide treatment to restore physical, psycho-social, educational, vocational and economic usefulness and independence to disabled persons. Rehabilitation concentrates on physical disabilities and impairments and utilizes a coordinated multidisciplinary team approach to help patients attain measurable goals.
Alcohol and Substance Abuse Treatment Facilities. These facilities provide inpatient treatment for alcohol and substance abuse, including medical evaluation, detoxification and rehabilitation. Specialized programs offer treatment for adults, adolescents, families and chronic abusers.
Psychiatric Hospitals. The psychiatric hospitals offer comprehensive, multidisciplinary adult, adolescent and substance abuse psychiatric programs. Patients are evaluated upon admission and an individualized treatment plan is developed. Elements of the treatment plan include individual, group and family therapy, activity therapy, educational programs and career and vocational planning.
Retirement Living Facilities. The retirement living facilities offer specially designed residential units for active and ambulatory elderly residents and provide various ancillary services. They contain nursing facilities to provide a continuum of care. The retirement living facilities offer their residents an opportunity for an independent lifestyle with a range of social and health services.
Medical Office Buildings. Medical office building facilities contain individual physician, physician group and other health care provider offices for the administration and treatment of patients, usually in close proximity to the general service acute care hospital to which the physicians are affiliated. The types of services provided in a medical office building may include outpatient therapy, clinics, examination facilities and the provision of other medical services in a non-hospital setting.
Acute Care Hospitals. Acute care hospitals provide services that include, among others, general surgery, internal medicine, obstetrics, emergency room care, radiology, diagnostic services, coronary care, pediatric services and psychiatric services. On an outpatient basis, the services include, among others, same day surgery, diagnostic radiology (e.g. magnetic resonance imaging, CT scanning, X-ray), rehabilitative therapy, clinical laboratory services, pharmaceutical services and psychiatric services.
LEASES
Each facility (which includes the land, buildings, improvements, related easements, and rights and fixtures (the "Leased Properties")) that is owned by the Company is leased to a health care provider pursuant to a long-term triple net lease (collectively, the "Leases") which generally contains terms as outlined below. Generally, the Leased Properties do not include major movable equipment.
The Leases generally have a fixed term of 10 to 20 years and contain multiple five-year renewal options. Some Leases are subject to earlier termination upon the occurrence of certain contingencies described in the Lease.
The Company's Leased Properties aggregated approximately $626,000,000 of gross real estate investments at December 31, 1994. The base rents range from approximately 9.75% to 13.5% per annum of the Company's equity investment in the Leased Properties and many may be adjusted upward during the fifth year of the Leases to an amount equal to 300 to 500 basis points over the five-year United States Treasury securities' yield at the time of adjustment. The base rents for the renewal periods are generally fixed rents for the initial renewal periods and market rates for later renewal periods. All Leases provide for either an automatic fixed annual rent escalation or additional variable rents in addition to the base rent, based on revenues exceeding specified base revenues. In addition, the Company typically charges a lease commitment fee at the initiation of the sale/leaseback transaction.
Each Lease is a triple net lease requiring the lessee to pay rent and all additional charges incurred in the operation of the Leased Property. The lessees are required to repair, rebuild and maintain the Leased Properties.
The obligations under the Leases are generally guaranteed by the parent corporation of the lessee, if any, or affiliates or individual principals of the lessee. Some obligations are further backed by letters of credit, cash collateral or pledges of certificates of deposit from various financial institutions which may cover up to one full year's lease payments and which remain in effect until the expiration of a fixed time period or the fulfillment of certain performance criteria. The Company also may obtain other credit enhancement devices similar to those it may obtain with respect to permanent mortgage loans. See "Permanent Mortgage Loans."
With respect to two of the facilities, the Company leases the land pursuant to ground leases and in turn subleases the land to the operator of the facility. Such subleases contain terms substantially similar to those found in the Leases.
PERMANENT MORTGAGE LOANS
The Company's permanent mortgage loan program is comprised of secured loans which are structured to provide the Company with interest income, additional interest based upon the revenue growth of the operating facility or a fixed rate increase, principal amortization and commitment fees. Virtually all of the approximately $874,000,000 of permanent mortgage loans as of December 31, 1994 are first mortgage loans.
The interest rates on the Company's investments in permanent mortgage loans for operating facilities range from 9.0% to 13.5% per annum on the outstanding balances. The yield to the Company on permanent mortgage loans depends upon a number of factors, including the stated interest rate, average principal amount outstanding during the term of the loan, the amount of the commitment fee charged at the inception of the loan, the interest rate adjustments and the additional interest earned.
The permanent mortgage loans for operating facilities made through December 31, 1994 are generally subject to 10-year terms with 25-year amortization schedules that provide for a balloon payment of the outstanding principal balance at the end of the tenth year. Some of the mortgages include an interest adjustment in the fifth year which generally provides for interest to be charged at the greater of the current interest rate or 300 to 400 basis points over the five-year United States Treasury securities' yield at the time of adjustment.
The Company generally requires a variety of additional forms of security and collateral beyond that which is provided by the lien of the mortgage. For example, the Company requires one or more of the following items: (a) a guaranty of the complete payment and performance of all obligations associated with each mortgage loan from the borrower's parent corporation, if any, other affiliates of the borrower and/or one or more of the individual principals controlling such borrower; (b) a collateral assignment from the borrower of the leases and the rents relating to the mortgaged property; (c) a collateral assignment from the borrower of all permits, licenses, approvals and contracts relating to the operation of the mortgaged property; (d) a pledge of all, or substantially all, of the equity interest held in the borrower; (e) cash collateral or a pledge of a certificate of deposit, for a negotiated dollar amount typically equal to three months to one year's principal and interest on the loan (which cash collateral or pledge of certificate of deposit typically remains in effect until the later to occur of (i) three years after the closing of the mortgage loan or (ii) the achievement by the facility of an agreed-upon cash flow debt coverage ratio for three consecutive fiscal quarters and, in the event that after the expiration of the letter of credit or pledge of certificate of deposit, the agreed-upon financial covenants are not maintained throughout the loan term, the borrower is often required to reinstate the cash collateral or pledge of certificate of deposit); (f) an agreement by any affiliate of the borrower or operator of the facility to subordinate all payments due to it from the borrower to all payments due to the Company under the mortgage loan; and (g) a security interest in all of the borrower's personal property, including, in some instances, the borrower's accounts receivable. In addition, the mortgage loans are generally cross-defaulted and cross-collateralized with any other mortgage loans, leases or other agreements between the borrower or any affiliate of the borrower and the Company.
DEVELOPMENT LOANS
The Company makes development loans that by their terms convert either into sale/leaseback transactions or permanent mortgage loans upon the completion of the facilities. Generally, the interest rates on the outstanding balances of the Company's development loans are 200 to 300 basis points over the prime rate of a specified financial institution. The Company also typically charges a commitment fee at the commencement of the loan. The development loan period generally commences upon the funding of such loans and terminates upon the earlier of the completion of development of the applicable facility or a specific date. This period is generally 12 to 18 months. During the term of the development loan, funds are advanced pursuant to draw requests made by the borrower in accordance with the terms and conditions of the applicable loan agreement which require a site visit prior to the advancement of funds. Monthly payments of interest only are made on the total amount of the loan proceeds advanced during the development period.
Meditrust began its development loan program in August 1987 and since that time has converted many of these development loans into sale/leaseback transactions or permanent mortgage loans representing an investment of $276,400,000 as of December 31, 1994. In addition, at December 31, 1994 the Company had outstanding development loans of $50,000,000 and was committed to providing additional financing of approximately $31,000,000. As with the Company's permanent mortgage financing program, the development loans generally include a variety of additional forms of security and collateral beyond the lien of the mortgage. See "Permanent Mortgage Loans." During the development loan period, the Company generally requires additional security and collateral in the form of either payment and performance completion bonds or completion guarantees by either one, or a combination of, the borrower's parent entity, other affiliates of the borrower or one or more of the individual principals of the borrower.
As a further safeguard during the development loan period, the Company generally will retain a portion of the loan proceeds equal to 10% of the principal loan amount until it has received satisfactory evidence that the project has been fully completed in accordance with the applicable plans and specifications and the period during which liens may be perfected with respect to any work performed, or labor or materials supplied, in connection with the construction of the project has expired. The Company also monitors the progress of the development of each project, the construction budget and the accuracy of the borrower's draw requests by having its own inspector perform on-site inspections of the project prior to the release of any requested funds.
ITEM 3.

ITEM 3.
LEGAL PROCEEDINGS
In December 1993, the Chapter 11 Trustee of Towers Financial Corporation commenced an action in the Suffolk County Superior Court for the Commonwealth of Massachusetts against one of the Company's lessees and in January 1994 two subsidiaries of the Company were named as additional defendants. The plaintiff alleges that it holds a prior security interest in the accounts receivable of seven health care facilities, one of which is owned by the Company. The plaintiff demands payment of all such receivables including those collected by the Company (which, as of December 31, 1994, totaled approximately $12,976,000). The Company is vigorously defending this action. It has filed an answer and counterclaim denying any liability to the plaintiff and asserting that the plaintiff does not have a valid prior security interest in any assets of the Company or its borrowers. The Company is a party to a number of other claims and lawsuits arising out of the normal course of business; the Company believes that none of these claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on the Company's business or on its consolidated financial position.
ITEM 4.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 4a.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information relative to the Company's executive officers is given as of February 28, 1995:
Abraham D. Gosman has been Chairman of the Company since its organization in 1985 and became Chief Executive Officer in February 1991. He had been Chief Executive Officer of A.M.A. Advisory Corp., the Company's former advisor (the "Advisor"), from June 1988 until February 1991 and President of the Advisor from its incorporation until July 1988. From August 1989 until April 12, 1991, Mr. Gosman had been Chief Executive Officer of Diamond Treatment Centers, Inc. ("Diamond") and, until he resigned in March 1991, each of its subsidiaries, which own and operate alcohol treatment facilities. On April 12, 1991, involuntary proceedings under Chapter 11 of the Federal Bankruptcy Code were filed against Diamond and each of its subsidiaries, to which filing such companies consented on April 24, 1991. Mr. Gosman was the Chief Executive Officer and Chairman of the Board of The Mediplex Group, Inc. ("Mediplex"), an operator and developer of health care facilities, from August 1990 until June 1994, when Mediplex was acquired by Sun. Mr. Gosman has been in the health care and development business for more than thirty years.
David F. Benson has been President of the Company since September 1991 and was Treasurer of the Company from January 1986 to May 1992. He was Treasurer of Mediplex from January 1986 through June 1987. He was previously associated with Coopers & Lybrand, independent accountants, from 1979 to 1985.
Michael F. Bushee has been Chief Operating Officer of the Company since September 1994. He was Senior Vice President of Operations of the Company from November 1993 through August 1994, Vice President from December 1989 to October 1993, Director of Development from January 1988 to December 1989 and has been associated with the Company since April 1987. He was previously associated with The Stop & Shop Companies, Inc., a retailer of food products and general merchandise, for three years and Wolf & Company, P.C., independent accountants, for four years.
Michael S. Benjamin has been Senior Vice President, Secretary and General Counsel of the Company since October 1993. He was Vice President, Secretary and General Counsel from May 1992 to October 1993, Secretary and General Counsel from December 1990 to May 1992 and Assistant Counsel to the Company from November 1989 to December 1990. His previous association was with the law firm of Brown, Rudnick, Freed & Gesmer, from 1983 to 1989.
Lisa P. McAlister has been Vice President of the Company since October 1993 and Treasurer since May 1992. She was Controller from December 1990 to May 1992 and Assistant Controller of the Company from November 1988 to December 1990. She was previously associated with Arthur Andersen & Co., independent accountants, from 1985 to 1988.
Stephen H. Press has been Vice President of Acquisitions of the Company since October 1993 and previously held this position with the Company from June 1987 to December 1990. He was Vice President of Development and Regulatory Affairs for Integrated Health Services, Inc., a medical services company, from April 1991 to October 1993.
Keith E. Grant has been Controller of the Company since May 1992. He was Director of Operations Management of the Company from January 1990 to May 1992. He was previously associated with New MediCo Holding Co., Inc., an operator of health care facilities, from September 1989 to December 1989 and Damon Corporation, a health care company, from August 1971 to August 1989.
PART II
ITEM 5.

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) and (b) This information is incorporated herein by reference to "Stock Data" on page 28 of the 1994 Annual Report to Shareholders.
(c) The Company has declared the following dividends during its two most recent fiscal years:
The Company intends to distribute to its shareholders on a quarterly basis a majority of cash flow from operating activities available for distribution. Cash flow from operating activities available for distribution to shareholders of the Company will be derived primarily from the rental payments and interest payments derived from its real estate investments. All distributions will be made by the Company at the discretion of the Trustees and will depend on the earnings of the Company, its financial condition and such other factors as the Trustees deem relevant. In order to qualify for the beneficial tax treatment accorded to real estate investment trusts by Sections 856 to 860 of the Internal Revenue Code, the Company is required to make distributions to holders of its Shares of at least 95% of its "real estate investment trust taxable income".
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
- ----------- (1) Dividends, used in this context, may include distributions in excess of current or accumulated net income.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Current Report on Form 8-K dated March 8, 1995.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to the "Consolidated Financial Statements", "Notes to Consolidated Financial Statements" and "Report of Independent Accountants" in the Current Report on Form 8-K dated March 8, 1995.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Trustees of Meditrust:
Our report on the consolidated financial statements of Meditrust has been incorporated by reference in this Form 10-K from Meditrust's Current Report on Form 8-K dated March 8, 1995. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 31 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts January 16, 1995
(A) Costs primarily associated with the disposition of certain real estate investments. (B) Includes $9,100,000 reclassified as a reduction to Other Assets and $2,172,009 relating to the valuation of a real estate investment.
(A) Reclassified from valuation allowance included in Accrued Expenses and Other Liabilities.
MEDITRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED DECEMBER 31, 1994
MEDITRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED DECEMBER 31, 1994
MEDITRUST SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED DECEMBER 31, 1994
(1) Facility classifications are Long-Term Care (LTC), Retirement Living (RL), Psychiatric Hospital (Psych), and Rehabilitation Hospital (Rehab).
(2) Gross amount at which land is carried at close of period also represents initial cost to the Company.
(3) Cost for federal income tax purposes.
(4) Depreciation is calculated using a 40-year life for all completed facilities.
(5) Real estate and accumulated depreciation reconciliations for the three years ended December 31, 1994 are as follows:
MEDITRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1994
[CAPTION]
MEDITRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE, CONTINUED DECEMBER 31, 1994
MEDITRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE, CONTINUED
(A) Virtually all mortgage loans on real estate are first mortgage loans. (B) Ten-year terms (except for a loan on fifteen facilities located in nine states which is two years, Bourne and New Bedford, MA and Lauderhill, FL, which are five years and Waterbury and Bristol, CT, and a loan on ten facilities located in three states which are seven years) with principal and interest payable at varying amounts over life to maturity with interest adjustment generally at the end of the fifth year. (C) Balloon payment is due upon maturity based on current interest rate with various prepayment penalties. (D) No mortgage loan is subject to delinquent principal or interest. (E) Mortgage loan term has been extended for a one year period. (F) The aggregate cost for federal income tax purposes. (G) Reconciliation of carrying amount of mortgage loans for the three years ended December 31, 1994 is as follows:
Item 9.

Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NOT APPLICABLE.
PART III
Item 10.



Item 10.
TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to Item 4a above and the table and the information following it appearing in the first subsection of the section entitled "Election of Trustees" contained in the Company's Proxy Statement for its Annual Meeting of Shareholders ("Annual Meeting Proxy Statement"), to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended ("Regulation 14A"). There are no family relationships among any of the Trustees or executive officers of the Company.
Incorporated by reference to the section entitled "Certain Transactions" contained in the Company's Annual Meeting Proxy Statement, to be filed pursuant to Regulation 14A.
Item 11.

Item 11.
EXECUTIVE COMPENSATION
Incorporated by reference to the section entitled "Executive Compensation" contained in the Company's Annual Meeting Proxy Statement, to be filed pursuant to Regulation 14A.
Item 12.

Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the table appearing in the first subsection of the section entitled "Election of Trustees" and the section entitled "Voting Securities, Principal Holders Thereof and Holdings by Certain Executive Officers" contained in the Company's Annual Meeting Proxy Statement, to be filed pursuant to Regulation 14A.
Item 13.

Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section entitled "Certain Transactions" contained in the Company's Annual Meeting Proxy Statement, to be filed pursuant to Regulation 14A.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
No financial statements have been filed as a part of this report other than those incorporated by reference in Item 8.
2. Financial Statement Schedules Page(s)
Report of Independent Accountants on Financial Statement Schedules.... 21
II. Valuation and Qualifying Accounts..................... 22 III. Real Estate and Accumulated Depreciation.............. 23-26 IV. Mortgage Loans on Real Estate......................... 27-29
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or have been disclosed in the notes to consolidated financial statements, and therefore, have been omitted.
3. Exhibits
Exhibits required as part of this report are listed in the index appearing on Pages 34 through 37.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
(b) During the quarter ended December 31, 1994, the Company filed two reports (without financial statements) on Form 8-K as follows:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MEDITRUST
By:/s/ Lisa P. McAlister ----------------------------- Vice President and Treasurer (and Principal Financial and Accounting Officer)
Dated: March 15, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
The Declaration of Trust establishing Meditrust dated August 6, 1985 (the "Declaration"), a copy of which is duly filed in the office of the Secretary of State of the Commonwealth of Massachusetts, provides that the name "Meditrust" refers to the Trustees under the Declaration collectively as Trustees, but not individually or personally; and that no Trustee, officer, shareholder, employee or agent of the Company shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, the Company. All persons dealing with the Company, in any way, shall look only to the assets of the Company for the payment of any sum or the performance of any obligation.
EXHIBITS