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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
 
COMMISSION FILE NUMBER 1-13845
 
                           BALANCED CARE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      25-1761898
(STATE OR OTHER JURISDICTION OF INCORPORATION       (I.R.S. EMPLOYER IDENTIFICATION NO.)
                OR ORGANIZATION)
</TABLE>
 
                          5021 LOUISE DRIVE, SUITE 200
                       MECHANICSBURG, PENNSYLVANIA 17055
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<S>                                            <C>
        COMMON STOCK, $ .001 PAR VALUE                    AMERICAN STOCK EXCHANGE
            (TITLE OF EACH CLASS)               (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
</TABLE>
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
     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 CHECK MARK  No
 
     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 the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K.  [ ]
 
     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 18, 1998 was approximately $79,688,869, based on
the last reported sales price of $6.25 as reported by the American Stock
Exchange. Shares of common stock known by the registrant to be beneficially
owned by executive officers or directors of the registrant are not included in
the computation; however, shares of common stock reported to be beneficially
owned by holders of 5% or more of the common stock are included in the
computation. The registrant has made no determination whether any of such
persons are "affiliates" within the meaning of Rule 12b-2 under the Securities
Exchange Act of 1934. The number of shares of Common Stock outstanding on
September 18, 1998 was 16,697,407 shares.
 
     Documents incorporated by reference:
 
        Selected portions of the 1998 Annual Report to Stockholders -- Part I,
        Part II and Part IV of this Report.
 
        Selected portions of the 1998 Proxy Statement -- Part III of this
        Report.
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1--BUSINESS
 
THE COMPANY
 
     Balanced Care Corporation (the "Company") was formed in April 1995 to
develop senior care continuums which meet the needs of upper middle, middle and
moderate income populations in non-urban, secondary markets. The Company
considers upper middle, middle and moderate income populations to consist of
those individuals whose income and assets enable them to afford senior living
and care services at average daily rates of $85, $75 and $65, respectively. The
Company intends to utilize assisted living facilities in selected markets as the
primary entry point and service platform to develop a care continuum (the
"Balanced Care Continuum") consisting of various health care and hospitality
services, including, where appropriate, physical, occupational and speech
therapy, home health care services on an intermittent basis, dementia and
Alzheimer's services and skilled/subacute care delivered in a skilled nursing
setting, enabling residents to age in place. The Company believes that
non-urban, secondary markets are underserved, highly fragmented and less prone
to intense competition from larger providers. The Company believes that these
factors will enable it to establish a leading position as a provider of a market
differentiated, consumer preferred continuum of senior care services in such
markets. To achieve its goals, the Company intends to: (i) provide a range of
high quality, individualized senior care services and programs, (ii) develop the
Balanced Care Continuum, (iii) focus on non-urban, secondary markets, (iv)
continue developing the Company's signature series assisted living facilities,
(v) pursue growth through selective acquisitions, (vi) achieve the benefits of
regional density by clustering, and (vii) expand referral networks and strategic
alliances.
 
     Since its inception, the Company has grown primarily through acquisitions
and development. During the fiscal year ended June 30, 1998 ("Fiscal 1998"), the
Company completed acquisitions of Heavenly Health Care, Inc. d/b/a Joe Clark
Residential Care Homes in August 1997, Feltrop's Personal Care Home and Butler
Senior Care in October 1997, Triangle Retirement Services, Inc. d/b/a Northridge
Retirement Center in December 1997, Gethsemane Affiliates in January 1998 and
Potomac Point in June 1998. The Company completed the divestiture of Long-Term
Care Pharmaceutical, Inc. (the "Pharmacy") in October 1997 (the "Pharmacy
Divesture"). As of June 30, 1998, the Company has also designed, developed and
opened 12 of its Outlook Pointe(R) signature series assisted living facilities,
11 of which are managed by the Company and one of which is leased by the
Company. As of June 30, 1998, the Company operated a total of 37 assisted living
facilities, 13 skilled nursing facilities and four independent living facilities
in Pennsylvania, Missouri, Arkansas, North Carolina, Virginia, Ohio and
Wisconsin, as well as a home health agency in Missouri and eight rehabilitation
therapy operations located in Pennsylvania and Arkansas. Assuming completion of
the planned divestiture of the Company's assisted living facilities in
Wisconsin, at June 30, 1998, the Company owned nine, leased 27 and managed 11
senior living and health care facilities in Pennsylvania, Missouri, Arkansas,
North Carolina, Ohio and Virginia with a capacity for 1,729 assisted living
residents, 1,294 skilled nursing patients and 120 independent living residents.
 
     The Balanced Care Continuum is being developed to deliver consumer-focused
health care and hospitality services that balance seniors' desire for
independence with their evolving health care needs. The Company's philosophy
includes the belief that wellness and preventative therapy will strengthen
residents, improve their health and forestall the deterioration that generally
accompanies aging, thus extending their lives and lengths of stay in assisted
living facilities. The Company's wellness-oriented program, Balanced Gold(R),
has been developed to predict and proactively address resident care needs,
including stabilizing and improving residents' cognitive, emotional and physical
well being. The Balanced Gold(R) program is included in the Company's core
services package at each of its Outlook Pointe(R) signature series assisted
living facilities, and the Company intends to implement all or part of the
program at its other assisted living facilities as appropriate. Preventative,
restorative and rehabilitative services are also expected to be made available
to residents through outpatient medical rehabilitation, home health care,
programs for residents with Alzheimer's and other services provided by the
Company or by an alliance partner or other third party. By offering services and
programs that are intended to enable residents to stay healthier longer and
prolong their stay at assisted living facilities, the Company believes that its
services and programs will address the preferences and needs of seniors, while
at the same time
 
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<PAGE>   3
 
forestalling the need for residents to move to a more costly long-term care
setting, such as a skilled nursing facility. As resident needs mandate migration
into a skilled nursing or subacute program, the Company believes that its
skilled nursing facilities will provide a transition for the resident with a
focus on demonstrated outcomes and cost effective care. The Company believes
that its approach to senior care will enable it to be a leading provider of a
continuum of senior care services in targeted non-urban, secondary markets.
 
THE SENIOR CARE INDUSTRY
 
     The senior care industry is characterized by a wide range of living
accommodations and health care services. For those who are able to live in a
home setting, home health care and other limited services can be provided.
Community housing or retirement centers, which are commonly referred to as
independent living facilities, are also available to persons who need limited
assistance, such as with meal preparation, housekeeping and laundry. Assisted
living facilities are typically for those persons whose physical or cognitive
frailties have reached a state where other living accommodations can no longer
provide the level of care required but who do not yet need the continuous
medical attention provided in a skilled nursing facility. Generally, assisted
living facilities provide a combination of housing and 24-hour personal support
services designed to assist seniors with activities of daily living ("ADLs"),
which include bathing, eating, personal hygiene, grooming, ambulating and
dressing. Certain assisted living facilities also offer higher levels of
personal assistance for residents with Alzheimer's disease or other forms of
dementia. Skilled nursing facilities provide care for those who need a minimum
of three hours of nursing per day.
 
     The senior care industry, including assisted living, is highly fragmented
and characterized by numerous providers whose services, experience and capital
resources vary widely. The Company believes that few operators of assisted
living facilities, particularly those in secondary markets, focus on providing a
range of senior living and health care services that have been designed to
enable residents to stay in a preferred setting longer. Most of the markets
targeted by the Company for development have existing assisted living and/or
skilled nursing providers.
 
     The Company believes that the assisted living industry is evolving as the
preferred alternative to meet the growing demand for a cost effective setting
for those seniors who cannot live independently due to physical or cognitive
frailties, but who do not require the more intensive medical attention provided
by a skilled nursing facility. According to the United States Bureau of the
Census, approximately 45% of persons aged 85 years and older, approximately 24%
of persons aged 80 to 84 and approximately 20% of persons aged 75 to 79 need
assistance with ADLs. In 1996, according to industry estimates, the assisted and
independent living industries generated approximately $12 to $14 billion in
revenues.
 
     The Company believes that a number of factors will contribute to the
continued growth of the assisted living industry, including:
 
  Consumer Preference
 
     The Company believes that assisted living is increasingly becoming the
setting preferred by prospective residents as well as their families, who are
often the decision makers for seniors. Assisted living is generally a more
attractive, service oriented and lower cost alternative to other types of senior
care facilities, offering seniors greater independence and allowing them to age
in place in a residential setting.
 
  Cost Effectiveness
 
     Assisted living facilities provide a cost effective alternative to other
types of facilities that may provide more care than a senior needs. The average
annual cost for a patient in a skilled nursing facility approaches $40,000 and,
in the case of a private pay patient, can exceed $75,000 per year in certain
markets. In contrast, the average annual cost for a resident of an assisted
living facility is generally 30% to 50% lower than skilled nursing facilities
located in the same region. Additionally, the Company also believes that the
cost of assisted living services compares favorably with home health care,
particularly when costs associated with housing, meals and personal care
assistance are taken into consideration.
 
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<PAGE>   4
 
  Changing Income and Family Dynamics
 
     The Company believes that the increasing income of seniors, as well as
changing family dynamics, will increase the demand for assisted living and
health care services. According to the United States Bureau of the Census, the
median income of the elderly population has been increasing. Accordingly, the
Company believes that the number of seniors who are able to afford high-quality
senior residential services such as those offered by the Company will also
increase. Additionally, the number of two-income households has increased over
the last decade and the geographical separation of senior family members from
their adult children has risen. As a result, many families that traditionally
would have provided the care and services offered by the Company to senior
family members are less able to do so. The Company believes that assisted living
facilities represent an attractive and independent environment for senior family
members.
 
  Demographics
 
     The target market for the Company's services are persons generally 75 years
and older, one of the fastest growing segments of the United States population.
According to the United States Bureau of the Census, the portion of the United
States population aged 75 and older is expected to increase by approximately
29%, from approximately 13.0 million in 1990 to approximately 16.8 million by
the year 2000, and the number of persons aged 85 and older, as a segment of the
United States population, is expected to increase by approximately 43%, from
approximately 3.0 million in 1990 to over 4.3 million by the year 2000.
Furthermore, the number of persons afflicted with Alzheimer's disease is also
expected to increase in the coming years. According to data published by the
American Psychiatric Association, Alzheimer's disease affects approximately 5%
to 8% of individuals over the age 65, 15% to 20% of individuals over the age of
75 and 25% to 50% of individuals over the age of 85.
 
  Supply/Demand Imbalance
 
     The Company believes that non-urban secondary markets are often underserved
with respect to assisted living facilities. Based on bed need analyses performed
by the Company in connection with the prospective development of its assisted
living facilities, the need for the Company's services in its target markets is
typically three times the number of beds sought to be developed. When combined
with its market differentiated services package, the Company believes that it is
well positioned to be the preferred provider of senior care services in its
targeted markets.
 
     While the senior population is growing significantly, the supply of skilled
nursing beds per thousand persons aged 85 years and older is declining. This
imbalance may be attributed to a number of factors in addition to the aging of
the population. Many states, in an effort to maintain controls of Medicaid
expenditures on long-term care, have implemented more restrictive
certificate-of-need regulations or similar legislation that restricts the supply
of licensed skilled nursing facility beds. Additionally, acuity-based
reimbursement systems have encouraged skilled nursing facilities to focus on
higher acuity patients. The Company also believes that high construction costs
and limits on government reimbursement for the full cost of construction and
start-up expenses will also contain the growth and supply of traditional skilled
nursing beds. These factors, taken in combination, result in relatively fewer
skilled nursing beds available for the increasing number of seniors who require
assistance with ADLs but do not require 24-hour per day medical attention.
 
CARE AND SERVICES PROGRAMS
 
     The Company offers a continuum of services to seniors that includes
assisted living, medical rehabilitation, home health care, dementia and
Alzheimer's services, skilled nursing, subacute care and independent living
services.
 
  Assisted Living Services
 
     Admission; Resident Care Plan. The Company intends that its assisted living
facilities be the principal entry point into the Balanced Care Continuum. As a
result, the assisted living admission process is crucial to the proper placement
of residents and in the development of tailored resident care plans. Upon
admission to one of the Company's assisted living facilities, a physician
assesses the resident's health status and determines his or her
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<PAGE>   5
 
care needs. A lifestyle assessment is also conducted in consultation with the
resident, as well as his or her family and medical consultants, to determine the
resident's care and services preferences. From this assessment, each resident's
individualized care plan is developed to ensure that all staff members rendering
services meet the resident's specific needs and preferences whenever possible.
Each resident's care plan is reviewed periodically to determine when a change in
services is needed. The Company seeks to provide assisted living services that
allow a resident to maintain a dignified, independent lifestyle. Residents and
their families are encouraged to be partners in their care and to take as much
responsibility as possible for their well being.
 
     Care and Services. The Company offers a range of assisted living care and
services which are available 24 hours per day at each of its assisted living
facilities. The core services package offered by the Company includes personal
care, support and certain supplemental services. Personal care services include
assistance with ADLs, such as ambulating, bathing, dressing, eating, grooming,
personal hygiene, monitoring or assistance with medications and confusion
management. Support services include meal preparation, assistance with social
and recreational activities, laundry services, general housekeeping, maintenance
services and transportation services. Supplemental services, which are offered
at an extra charge, include extra transportation services, beauty and barber
services, extra laundry services and non-routine care services. The Balanced
Gold(R) program is included in the Company's core services package at each of
its signature series assisted living facilities, and the Company intends to
implement all or part of the program at its other assisted living facilities as
appropriate. To the extent permitted by state regulatory requirements, the
Company's facilities have been designed to accommodate special programs
including those for residents with Alzheimer's and other forms of dementia, as
well as medical rehabilitation and home health care services. Medical
rehabilitation services are provided by certified physical, occupational and
speech therapists and psychologists, with physician oversight. Home health care
services are provided through the Company's licensed home health agency in
Missouri or by a third party.
 
     Balanced Gold(R) The Company's Balanced Gold(R) program is a
wellness-oriented program which assists residents in remaining independent and
involved with their families, other residents and the local community. The
Balanced Gold(R) program is included in the Company's core services package at
each of its Outlook Pointe(R) signature series assisted living facilities, and
the Company intends to implement all or part of the program at its other
assisted living facilities as appropriate. Balanced Gold(R) is designed to
address a variety of factors that may affect adversely the health of assisted
living residents, including balance and gait difficulties, incontinence,
cognitive impairment, stress due to pain and chronic conditions and grieving due
to multiple losses in the resident's life. The Balanced Gold(R) program includes
tai chi exercise to improve balance and gait problems; individually designed
exercise programs, including incontinence and pelvic exercises and diet
guidelines; "Wisdom Keeper" programs to challenge and stimulate mental
capabilities; "Relaxation and Vitality" programs of deep breathing, stretching
exercises and sitting and walking meditation; "Golden Living" programs to assist
with grief and loss; gardening to encourage nurturing and independence; and
walking programs to promote health and fitness. Company staff, in consultation
with the resident, as well as his or her family and medical consultants,
determine which of the Balanced Gold(R) activities are appropriate and best
suited to the resident's needs, interests and capabilities.
 
     Alzheimer's "Keepsakes" Program. The Company has developed, with the
assistance of its Health Care Advisory Board, an approach to Alzheimer's and
other forms of dementia that includes specialized assessments and clinical
approaches for early and accurate detection, placement and intervention. To meet
the needs of residents with Alzheimer's disease and other related forms of
dementia, the Company has developed its "Keepsakes" program to maintain
familiarity, reduce confusion, and still provide a pleasant and appropriate
living environment for these residents. The Company's approach to Alzheimer's
also calls for support groups to be organized in conjunction with the local
chapter of the Alzheimer's Association to provide a safe and supportive
community through which caregivers can share their thoughts and concerns. The
Company's signature series assisted living facilities are designed to enable
these specialized services to be provided at all newly developed facilities, and
to the extent permitted by state regulatory requirements, the Company intends to
implement this program at its other assisted living facilities.
 
     The Company currently operates an Alzheimer's "Keepsakes" program at three
of its assisted living facilities and at one dedicated unit in its skilled
nursing facilities. The Company plans to develop its Alzheimer's
 
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"Keepsakes" program at each of its existing assisted living facilities and in
all facilities being developed. These units feature areas specifically designed
to provide attention, care and services needed to help residents with
Alzheimer's maintain a higher quality of life. The Alzheimer's team members are
specially trained to understand behavior, maximize function, promote safety and
encourage resident independence.
 
     Medication Management. Each assisted living facility contracts with a
pharmacy to provide prescription drugs to those residents who desire to utilize
the pharmacy. Residents are free to use a pharmacy of their choice.
Additionally, subject to state regulatory requirements, at the resident's
request, and based on the facility's assessment of the resident's needs, the
assisted living facility may manage a resident's medications by storing
prescription drugs within the facility, delivering the drugs to the resident and
reminding the resident when the medications need to be taken.
 
     Assisted Living Charges. Monthly assisted living resident charges are
based, in part, on the type of assisted living suite selected and are set at
rates designed to be within the means of seniors in the secondary markets served
by the Company. In addition to its core services package, at certain facilities,
including all newly developed Outlook Pointe(R) facilities, the Company offers
three additional levels of services to residents whose frailties or medical
condition are more acute. These additional levels of services are currently
offered at prices equal to 16%, 23% and 30% above the price of the Company's
core assisted living services package. As of June 30, 1998, approximately 17%,
10% and 19% of the Company's assisted living residents at those facilities
received services at the first, second and third levels of additional services,
respectively. Substantially all of the Company's current revenues from the
provision of assisted living services are attributable to private payors.
 
  MEDICAL REHABILITATION SERVICES
 
     The Company's philosophy for addressing seniors' living and care needs
includes the belief that preventative therapy will strengthen residents, improve
their overall health and forestall the deterioration that generally accompanies
aging, thus extending their lives and lengths of stay in assisted living
facilities. The Company has developed specialized medical rehabilitation
programs to address the needs of seniors, including programs to specifically
address balance and gait difficulties, incontinence, lymphodema, pain and
osteoarthritis, as well as specific preventative therapy programs for seniors.
For residents in the Company's signature series assisted living facilities, each
rehabilitation program is followed up with specialized regimens offered as part
of the Balanced Gold(R) program. Should a resident's condition warrant
additional rehabilitation, on-staff and contracted therapists are available.
 
     The Company currently provides medical rehabilitation services, including
physical and occupational therapy, on an outpatient basis to residents at eight
of its assisted living facilities as well as to patients in a surrounding
community. These outpatient services are provided through the Company's licensed
rehabilitation agencies in Pennsylvania and Arkansas or certain of its skilled
nursing facilities. Rehabilitation services are provided at the Company's other
facilities through contract services, outpatient rehabilitation facilities or
home health agencies.
 
     The Company intends to establish or acquire additional licensed
rehabilitation agencies in those states where it is developing assisted living
facilities. These agencies will enable the Company to provide medical
rehabilitation services to its assisted living residents and the surrounding
communities. Additionally, the Company may enter into strategic joint venture
relationships with rehabilitation providers to provide medical rehabilitation in
certain markets.
 
     Substantially all of the Company's current revenues from provision of
medical rehabilitation services are attributable to federal government
reimbursement programs.
 
  HOME HEALTH CARE SERVICES
 
     The Company provides home health care services through its licensed home
health agency in Missouri to residents of its assisted and independent living
facilities and patients from the surrounding areas. The services the Company
provides include: (i) general and specialty nursing services to individuals with
acute illness, long-term chronic health conditions, permanent disabilities,
terminal illnesses or post-procedural needs; (ii) therapy services
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consisting of, among other things, physical, occupational and speech therapies;
(iii) personal care services and assistance with ADLs; (iv) hospice care for
persons in the final phases of incurable disease; (v) respiratory, monitoring,
medical equipment and supplies; and (vi) a comprehensive range of home infusion
and enteral therapies. The Company intends to develop, acquire or manage home
health care service businesses in order to provide home health care services at
other facilities and to seniors living in surrounding areas. Assisted living
residents receiving home health care services may require skilled nursing
services as their medical conditions warrant.
 
     Substantially all of the Company's current revenues from provision of home
health care services are attributable to federal government reimbursement
programs.
 
  SKILLED NURSING SERVICES
 
     The Company currently provides skilled nursing services at three facilities
in Pennsylvania (169 licensed beds) and ten facilities (1,125 licensed beds) in
southwest Missouri. The Company's skilled nursing facilities provide traditional
long-term care through 24-hour per day skilled nursing care by registered
nurses, licensed practical nurses and certified nursing aides. The Company also
offers physical rehabilitation at its skilled nursing facilities, including
physical, occupational and speech therapies. Board certified physicians direct
the skilled nursing services offered at these facilities.
 
     For Fiscal 1998, approximately 80% of the Company's patient services
revenues were attributable to federal and state government reimbursement
programs.
 
  INDEPENDENT LIVING SERVICES
 
     The Company operates four independent living facilities in Missouri located
adjacent to skilled nursing facilities operated by the Company. Services
provided at such facilities include: meal preparation, housekeeping, laundry and
transportation. These facilities are licensed as assisted living facilities and
may be converted from independent living facilities at the option of the
Company.
 
     All of the Company's current revenues from the provision of independent
living services are attributable to private payors.
 
THE OUTLOOK POINTE(R) SIGNATURE SERIES ASSISTED LIVING FACILITY MODELS
 
     The architectural and interior design concepts of the Outlook
Pointe(R)signature series assisted living facility models incorporate the
Company's operating philosophy of protecting resident privacy, enabling freedom
of choice, encouraging independence and fostering individuality in a home-like
setting. The buildings are residential in appearance, designed as
"neighborhoods" within a "community," and offer a home-like environment, while
being constructed to institutional health care facility standards. The building
designs incorporate the Company's mission and dedication to providing a new
outlook for seniors, encouraging choice, wellness, and vitality. The Company
believes that the Outlook Pointe(R) signature series facilities achieve its
mission and goals to meet the needs and expectations of its residents and their
families, providing a safe environment and care in a home-like setting where the
Company is responsive to each individual's special needs and the universal
desire for independence, dignity and purpose. The Company believes that its
residential environment also accomplishes several other objectives, including:
(i) lessening the trauma of change for residents and their families; (ii)
achieving operational efficiencies; (iii) facilitating resident mobility and
ease of access by caregivers; and (iv) differentiating the Company from other
assisted living and long-term care operators.
 
     The models are freestanding buildings that range in size from 48 units to
106 units and are designed to accommodate the full range of assisted living
services offered by the Company, including the Company's Balanced Gold(R) and
Alzheimer's "Keepsakes" programs. The buildings are usually one to two stories
and of incombustible construction, and are designed to accommodate future
expansion. The interior layout is designed to promote efficient delivery of
resident care as well as resident independence. The design of the facilities
allows specialized grouping of residents, including residents receiving care in
the Alzheimer's "Keepsakes" program, and a central core for resident
interaction. In addition, the buildings are designed with fully-equipped therapy
 
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gyms and treatment rooms for provision of medical rehabilitation services. The
buildings range in size from 27,000 square feet to 68,000 square feet and are
adaptable to construction on sites ranging from two to five acres. Approximately
33% of a building is devoted to common areas and contains resident amenities
including a parlor, living room, dining room, club room, library, activity room,
beauty/barber shop, spa, laundry, wellness (therapy) center and neighborhood
lounges with pantries. The support areas include administrative offices,
resident services offices, a kitchen, common laundry and
housekeeping/maintenance areas. Resident units, including studio, privacy,
companion and one bedroom suites, are functionally grouped as "neighborhoods"
within a "community" and are configured internally to provide private bath,
living area and sleeping area with emergency call systems and cable television
service. Porches, terraces, gardens and activity areas are designed to fulfill
outdoor interests of residents.
 
     The Company has three basic building plan design prototypes which provide
it with flexibility in adapting the model to a particular site and to
accommodate the various income and care levels demanded in a particular market.
Daily rates currently range from $71.00 to $105.00 at the Prototype A
facilities, from $65.00 to $85.00 at the Prototype B facilities, and from $58.00
to $66.00 at the Prototype C facilities.
 
OPERATING FACILITIES
 
     The following table sets forth certain information as of June 30, 1998 with
respect to the senior living and care facilities (other than its Wisconsin
assisted living facilities which the Company plans to sell) operated by the
Company.
 
<TABLE>
<CAPTION>
                                           OWNED (O)/       RESIDENT CAPACITY
                                           LEASED (L)/      BY CARE LEVEL (1)
                                             MANAGED      ---------------------
            FACILITY LOCATION                  (M)         ALF      SNF     ILF
            -----------------              -----------    -----    -----    ---
<S>                                        <C>            <C>      <C>      <C>
Currently Operated:
PENNSYLVANIA
  Allison Park
     Outlook Pointe(R) at Allison Park(2)       L            79       --     --
  State College
     Outlook Pointe(R) at State
       College(3)                               L            54       --     --
  Altoona
     Outlook Pointe(R) at Altoona(4)(5)         M            54       --     --
  Harrisburg
     Outlook Pointe(R) at Harrisburg
       (5)(13)                                  M            57       --     --
  Reading
     Outlook Pointe(R) at Reading(5)(14)        M            56       --     --
  Bloomsburg
     Bloomsburg Manor(6)                        L            69       --     --
  Darlington
     Balanced Care at Darlington(7)             O            92       --     --
  Kingston
     Kingston Manor(6)                          L            78       --     --
     Kingston Health Care Center(6)             L            --       65     --
  Peckville
     Mid Valley Manor(6)                        L            71       --     --
     Blakely Pine Health Care Center(6)         L            --       38     --
  Old Forge
     Old Forge Manor(6)                         L            49       --     --
  Wyoming
     West View Manor(6)                         L            50       --     --
  Butler
     Silver Haven Summit(8)                     O            36       --     --
  Sarver
     Sterling Care of Sarver(8)                 O            40       --     --
</TABLE>
 
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<TABLE>
<CAPTION>
                                           OWNED (O)/       RESIDENT CAPACITY
                                           LEASED (L)/      BY CARE LEVEL (1)
                                             MANAGED      ---------------------
            FACILITY LOCATION                  (M)         ALF      SNF     ILF
            -----------------              -----------    -----    -----    ---
<S>                                        <C>            <C>      <C>      <C>
  Saxonburg
     Sterling Care of Saxonburg(8)              O           123       --     --
  Bloomsburg
     Gethsemane Retirement Community and
       Rehabilitation Center (9)                O            --       66     --
  Millville
     Gethsemane Assisted Living
       Community(9)                             O            51       --     --
                                                          -----    -----    ---
          SUBTOTAL:                                         959      169      0
                                                          -----    -----    ---
ARKANSAS
  Sherwood
     Outlook Pointe(R) at Sherwood(5)(10)       M            57       --     --
  Mountain Home
     Outlook Pointe(R) at Mountain
       Home(4)(5)                               M            57       --     --
  Maumelle
     Outlook Pointe(R) at Maumelle(4)(5)        M            57       --     --
  Pocohontas
     Outlook Pointe(R) at
       Pocohontas(4)(5)                         M            57       --     --
  Blytheville
     Outlook Pointe(R) at
       Blytheville(5)(11)                       M            59       --     --
                                                          -----    -----    ---
          SUBTOTAL:                                         287        0      0
                                                          -----    -----    ---
VIRGINIA
  Harrisonburg(16)                              M            57       --     --
     Outlook Pointe(R) at Harrisonburg
  Roanoke(16)                                   M            64       --     --
     Outlook Pointe(R) at Roanoke
  Stafford(17)                                                        --     --
     Potomoc Point Residential and
       Geriatric Care Facility                  L            40
                                                          -----    -----    ---
          SUBTOTAL:                                         161        0      0
                                                          -----    -----    ---
OHIO
  Ravenna
     Outlook Pointe(R) at Ravenna(5)(15)        M            57       --     --
NORTH CAROLINA
  Raleigh
     Northridge Retirement Center(12)           O           117       --     --
                                                          -----    -----    ---
MISSOURI
  Dixon
     Balanced Care, Dixon(18)                   L            --       60     --
  Hermitage
     Balanced Care, Hermitage(18)               L            --      120     --
  Lebanon
     Balanced Care, Lebanon North(18)           L            --      180     --
     Balanced Care, Lebanon South(18)           L            12      106     --
     The Terraces at Lebanon South(18)          L            --       --     31
  Nixa
     Balanced Care, Nixa(18)                    L            --       82     --
     The Terraces at Nixa(18)                   L            --       --     30
  Republic
     Balanced Care, Republic(18)                O            --      127     --
</TABLE>
 
                                        9
<PAGE>   10
 
<TABLE>
<CAPTION>
                                           OWNED (O)/       RESIDENT CAPACITY
                                           LEASED (L)/      BY CARE LEVEL (1)
                                             MANAGED      ---------------------
            FACILITY LOCATION                  (M)         ALF      SNF     ILF
            -----------------              -----------    -----    -----    ---
<S>                                        <C>            <C>      <C>      <C>
MISSOURI -- (CONTINUED)
  Springfield
     Balanced Care, Springfield East(18)        L            --      120     --
     The Terraces at Springfield East(18)       L            --       --     31
     Balanced Care, Springfield West
       I(18)                                    L            --       90     --
     Balanced Care, Springfield West
       II(18)                                   L            --      180     --
     The Terraces at Springfield(19)            L            34       --     --
  Nevada
     Balanced Care, Nevada(18)                  O            --       60     --
     The Terraces at Nevada(19)                 L            --       --     28
     The Terraces of Balanced Care(20)          L            27       --     --
     The Terraces of Balanced Care(20)          L            25       --     --
  Butler
     The Terraces of Balanced Care(20)          L            25       --     --
  Lamar
     The Terraces of Balanced Care(21)          L            25       --     --
                                                          -----    -----    ---
          SUBTOTAL:                                         148    1,125    120
                                                          -----    -----    ---
          TOTAL                                           1,729    1,294    120
                                                          =====    =====    ===
</TABLE>
 
---------------
 (1) "ALF" means assisted living facility, "SNF" means skilled nursing facility
     and "ILF" means independent living facility. The Company's ILFs in Missouri
     are licensed as ALFs and may be converted to ALFs as the needs of its
     residents so require.
 
 (2) Acquired March 1996.
 
 (3) Opened May 1997.
 
 (4) Opened October 1997.
 
 (5) In the third quarter of fiscal 1998, the Company sold certain of the assets
     and assigned its leasehold interest in this facility to an Operator/Lessee
     (as defined herein). The Company manages the facility for the
     Operator/Lessee and has an option to acquire the stock of the
     Operator/Lessee. See "Business--Development."
 
 (6) Acquired January 1997.
 
 (7) Acquired October 1997.
 
 (8) Acquired October 1997. A 29-bed expansion at Sterling Care of Saxonburg was
     completed and opened in early December 1997.
 
 (9) Acquired January 1998.
 
(10) Opened September 1997.
 
(11) Opened November 1997.
 
(12) Acquired December 1997.
 
(13) Opened December 1997.
 
(14) Opened January 1998.
 
(15) Opened February 1998.
 
(16) Opened May 1998.
 
(17) Acquired June 1998.
 
(18) Acquired August 1996.
 
(19) Acquired January 1997.
 
(20) Acquired May 1997.
 
(21) Acquired August 1997.
 
                                       10
<PAGE>   11
 
     The Company anticipates that the names of the following facilities in
Pennsylvania will be changed upon receipt of required regulatory approvals:
Kingston Manor to Outlook Pointe Commons(SM) at Kingston; Westview Manor to
Outlook Pointe Commons(SM) at Wyoming; Mid Valley Manor to Outlook Pointe
Commons(SM) at Mid Valley; Bloomsburg Manor to Outlook Pointe Commons(SM) at
Bloomsburg; Old Forge Manor to Outlook Pointe Commons(SM) at Old Forge;
Gethsemane Assisted Living to Outlook Pointe Commons(SM) at Eyers Grove;
Balanced Care at Darlington to Outlook Pointe Commons(SM) at South Beaver;
Sterling Care of Saxonburg to Outlook Pointe Commons(SM) at Saxonburg; Sterling
Care of Sarver to Outlook Pointe Commons(SM) at Sarver; Silver Haven Summit to
Outlook Pointe Keepsakes(SM) at Butler; Kingston Healthcare Center to Balanced
Care, Kingston; Blakely Pine Healthcare Center to Balanced Care, Mid Valley; and
Gethsemane Retirement Community and Rehabilitation Center to Balanced Care,
Bloomsburg. In addition, the Company anticipates that Northridge Retirement
Village will be changed to Outlook Pointe(R) at Northridge.
 
     The above table excludes the Company's seven Wisconsin assisted living
facilities which the Company intends to sell. The facilities consist of seven
owned assisted living facilities located in Beloit, Mauston, Monroe, Pardeville,
Portage, Tomah and Waupun, Wisconsin. In June 1997, management determined that
the market in which its Wisconsin assisted living facilities are located does
not provide adequate opportunity to achieve the operational efficiencies
necessary for the Company to operate profitably. As a result, the Company
committed to a plan for the disposal of its Wisconsin assisted living
facilities. In July 1998, the Company entered into a letter of intent to sell
the Wisconsin assisted living facilities to a midwestern-based company for
$2,900,000, the closing of which is subject to the negotiation of a definitive
asset purchase agreement. The transaction is expected to close by October 31,
1998.
 
     The Company also decided in June 1997 to sell the Pharmacy in order to
focus on its assisted living and skilled nursing operations and approached
national pharmacy providers about acquiring the Pharmacy. In October 1997, the
Company completed the Pharmacy Divestiture for net proceeds of approximately
$4,700,000, which provided some of the working capital needed to sustain the
Company's growth.
 
DEVELOPMENT
 
     An integral element of the Company's growth is the design, development and
opening of the Outlook Pointe(R) signature series assisted living facilities to
be owned by independent Operators/Lessees and managed by the Company. The
Company believes that the signature series assisted living facilities meet the
needs of the upper middle, middle and moderate income populations in its target
markets and are designed to provide the broad range of services contemplated by
its Balanced Care Continuum strategy over a range of pricing options. The
Company currently plans to develop more than 40 Outlook Pointe(R) signature
series assisted living facilities by June 30, 1999 and to continue its internal
development program beyond fiscal 1999.
 
     In evaluating a potential market, the Company utilizes an in-house
developed bed need model and a market analysis which considers such factors as
bed need, population, mobility factors, income and age demographics, target site
visibility, probability of obtaining zoning approvals, estimated level of market
demand, the opportunity for the Company to offer a range of services comprising
the senior living and health care continuum and the ability to maximize
management resources in a specific market by clustering its development and
operating activities.
 
     The primary phases of the Company's development process include: (i) the
pre-contract phase, representing the period prior to obtaining a development
agreement with the owner; (ii) the pre-construction phase, (iii) the
construction phase; and (iv) the initial occupancy phase. The primary milestones
in the Company's development process are: (i) site selection and signing of a
land purchase option agreement; (ii) obtaining permits and approvals necessary
to commence construction; (iii) execution of a development agreement; (iv)
completion of construction and obtaining a certificate of occupancy; and (v)
operational set-up and training prior to opening. Once a market has been
identified, site selection and signing of a land purchase option agreement
typically takes approximately 30 to 90 days and obtaining permits and approvals
takes approximately 60 to 90 days.
 
                                       11
<PAGE>   12
 
Architectural design is done in-house by a Company architect, while hands-on
construction functions are contracted to outside contractors. Construction of an
assisted living facility normally takes six to twelve months, depending on
geographic location, weather conditions and the size of the facility.
Pre-opening operational activities begin approximately six months prior to the
opening of the facility. After a facility receives a certificate of occupancy,
residents usually begin to move in immediately. The Company generally expects
occupancy of newly developed assisted living facilities to reach a targeted
occupancy of 92% within 10 to 21 months after opening, depending on the size of
the facility.
 
     The Company believes that it differentiates itself from many of its
competitors by its senior management's expertise in the development of
rehabilitation hospitals and other health care facilities and operations as well
as its in-house market research and development capabilities. The development
group is currently comprised of 15 professionals who have experience in real
estate and health care facility development, including analysts who target
potential markets through the use of an in-house developed bed need model and
developers who conduct market analysis to identify market bed needs, select
appropriate building sites, and coordinate all local and state governmental
license and permit approvals. The design and construction group is responsible
for adapting prototypical facility design to the selected site, making
adjustments to the prototype plans to comply with local building codes and
awarding and monitoring contracts with third party architects and general
contractors. In addition, the Company's design and construction group conducts
field inspections and construction draw approvals during the construction life
of the project. The development group and the design and construction group
collectively have over 150 years of construction management experience.
 
     The Company's financial analysts generate five year projections for each
anticipated project. These projections are based on all costs associated with a
particular prototype facility chosen for that locale. All projects are subject
to predetermined hurdle rates for return on investment and minimum margins for
net operating income and pretax income. The senior management team and Board of
Directors approve all development projects. The costs to develop and construct
an Outlook Pointe(R) signature series assisted living facility is generally
projected to range between $44,000 and $85,000 per bed.
 
     To date, the Company has developed assisted living facilities primarily for
health care REITs. The Company's recent and future development projects involve
or are expected to involve entering into development agreements with third party
owners, which are, or are expected to be, REITs. An independent third-party
company (the "Operator/Lessee") leases or is expected to lease the assisted
living facility from the REIT when construction has been completed and provide
funding for working capital during the initial occupancy period. The Company
manages, or expects to manage, the assisted living facility pursuant to
management agreements with the Operator/Lessee, which generally provide for
terms of two to nine years. Each management agreement provides, or is generally
expected to provide, for annual fees approximating 6% of net revenue of the
facility. In exchange for an option payment the Company will have the option to
purchase the stock or assets of the Operator/Lessee for an exercise price based
on formulas set forth in an option agreement.
 
     The following table sets forth certain information as of June 30, 1998
regarding the Outlook Pointe(R) signature series assisted living facilities for
which the zoning, permitting or construction process has commenced and which the
Company is developing for other independent Operators/Lessees. For each of the
locations, the Company or the prospective third-party owner has, at a minimum,
an option to purchase the real estate on which the facility is being developed.
The Company expects to manage each facility for an Operator/Lessee. In addition
to facilities listed below, the Company is also engaged in preliminary
development activities with respect to other possible sites for future
facilities.
 
                                       12
<PAGE>   13
 
<TABLE>
<CAPTION>
                                              ESTIMATED
                                            CONSTRUCTION       ESTIMATED
        ASSISTED LIVING          RESIDENT    START DATE     COMPLETION DATE
       FACILITY LOCATION         CAPACITY   (QUARTER END)    (QUARTER END)
       -----------------         --------   -------------   ---------------
<S>                              <C>        <C>             <C>
PENNSYLVANIA
  Scranton                           63       Commenced       Sept. 1998
  Lewisburg                          70       Commenced       Sept. 1998
  Hampden                           104       Commenced        Dec. 1998
  Midvalley                          40       Commenced       Sept. 1998
  Lewistown                          69       Commenced       Sept. 1998
  Dillsburg                          66       Commenced        Dec. 1998
  Berwick                            69       Commenced        Dec. 1998
  York                               66       Commenced        Mar. 1999
  Chippewa                           66       Commenced        Mar. 1999
  Lakemont Farms                    106       Commenced        June 1999
  Shippensburg                       66       Commenced        Dec. 1998
  Bridgeport                         66      Sept. 1998        June 1999
  Loyalsock                          66      Sept. 1998        June 1999
  Lebanon                            66      Sept. 1998       Sept. 1999
  Hanover                            62       Commenced        Dec. 1999
  Bangor                             72       Dec. 1998       Sept. 1999
  Selingsgrove                       72       Dec. 1998       Sept. 1999
  Johnstown                          66       Dec. 1998       Sept. 1999
                                  -----
          Subtotal:               1,255
 
OHIO
  Lima                               66       Commenced       Sept. 1998
  Mansfield                          66       Commenced       Sept. 1998
  Xenia                             104       Commenced        Dec. 1998
  Medina                             80       Commenced        Dec. 1998
  Hilliard                          106       Commenced        June 1999
  Centerville                       106       Commenced        June 1999
  Akron                             106       Commenced       Sept. 1999
  Steubenville                       80       Dec. 1998        Dec. 1999
  Westerville                       106      Sept. 1998       Sept. 1999
  Sagamore Hills                    106      Sept. 1998        Dec. 1999
                                  -----
          Subtotal:                 926
 
TENNESSEE
  Jackson                            66       Commenced        Dec. 1998
  Murfreesboro                       66       Commenced        Dec. 1998
  Bristol                            66       Commenced        Mar. 1999
  Hendersonville                     66       Commenced        June 1999
  Johnson City                       66       Commenced        June 1999
  Kingsport                          66       Commenced        June 1999
  Knoxville                         106       Commenced       Sept. 1999
  Greeneville                        66       Dec. 1998       Sept. 1999
  Clarksville                        66      Sept. 1998       Sept. 1999
  Morristown                         66       Dec. 1998       Sept. 1999
  OakRidge                           66       Dec. 1998       Sept. 1999
  Bartlett                           66       Dec. 1998       Sept. 1999
  Maryville                          66       Dec. 1998       Sept. 1999
                                  -----
          Subtotal:                 898
</TABLE>
 
                                       13
<PAGE>   14
 
<TABLE>
<CAPTION>
                                              ESTIMATED
                                            CONSTRUCTION       ESTIMATED
        ASSISTED LIVING          RESIDENT    START DATE     COMPLETION DATE
       FACILITY LOCATION         CAPACITY   (QUARTER END)    (QUARTER END)
       -----------------         --------   -------------   ---------------
<S>                              <C>        <C>             <C>
FLORIDA
  Pensacola                          60       Commenced        Mar. 1999
  Tallahassee                       106       Commenced        June 1999
  Titusville                         66      Sept. 1998       Sept. 1999
  Elfers                             66      Sept. 1998       Sept. 1999
  Rockledge                         116       Dec. 1998        Dec. 1999
  Leesburg                           66       Dec. 1998        Dec. 1999
                                  -----
          Subtotal:                 480
VIRGINIA
  Danville                           66       Commenced       Sept. 1998
  Chesterfield                       80       Commenced        June 1999
  Blacksburg                         66       Dec. 1998       Sept. 1999
                                  -----
          Subtotal:                 212
KENTUCKY
  Frankfort                          66       Dec. 1998       Sept. 1999
  Danville                           66       Dec. 1998       Sept. 1999
  Florence                           66       Dec. 1999        Dec. 1999
                                  -----
          Subtotal:                 198
WEST VIRGINIA
  Martinsburg                        66       Commenced        Dec. 1998
  Teay's Valley                      66       Commenced       Sept. 1999
  Vienna                             66      Sept. 1998        July 1999
                                  -----
          Subtotal:                 198
INDIANA
  Anderson                           80       Commenced        Dec. 1998
  Evansville                        106       Commenced        June 1999
                                  -----
          Subtotal:                 186
MICHIGAN
  Warren                            116       Dec. 1998        Dec. 1999
LOUISIANA
  Baton Rouge                        80       Dec. 1998        Dec. 1999
MISSISSIPPI
  Ridgeland                          80       Dec. 1998       Sept. 1999
MARYLAND
  Hagerstown                         66       Commenced        Mar. 1999
NORTH CAROLINA
  Greensboro                         50       Commenced       Sept. 1998
                                  -----
          TOTAL:                  4,745
                                  =====
</TABLE>
 
ACQUISITIONS AND STRATEGIC ALLIANCES
 
     Since its inception, the Company's growth has been substantially
attributable to the acquisition of 18 assisted living facilities with a capacity
for 1,043 residents, 13 skilled nursing facilities with a capacity for 1,294
patients, and four independent living facilities with a capacity for 120
residents, as well as a home health care agency (excluding the Company's seven
Wisconsin assisted living facilities and the Pharmacy). The Company intends to
continue to pursue selective acquisitions to enter new markets, to enable the
Company to develop and provide one or more components of the Balanced Care
Continuum in its markets, to create clusters of assisted
 
                                       14
<PAGE>   15
 
living facilities in selected markets, to benefit from operating efficiencies
and to develop a leading market position. The Company believes that clustering
facilities geographically will create opportunities for operating efficiencies
such as leveraging existing corporate office and regional operations and
marketing staff, lowering workers' compensation and other employee benefit costs
and lowering food and supplies costs. In addition, the Company will consider
entering into joint ventures or other alliances with skilled nursing, medical
rehabilitation, home health care and other senior health care providers as a
cost effective means of providing a full range of care to residents of the
Company's facilities and a senior care continuum that eases an individual's
transition from one setting to another.
 
     In evaluating a potential acquisition, the Company considers, among other
factors: (i) location, construction quality, condition and design of the
facility; (ii) current and projected facility cash flow; (iii) the ability to
increase revenue, occupancy and cash flows by providing a full range of
services; (iv) cost of facility repositioning (including renovations, if any);
(v) the reputation of the facility in the local market; and (vi) the extent to
which the acquisition will complement the Company's development plans and
strategy. The Company's senior management and its acquisition team have
extensive experience in the acquisition of assisted living and other health care
facilities, including market assessment, identification of targets, due
diligence, negotiating, pricing, structuring, closing and integrating
acquisitions. Additionally, the Company's senior management team has extensive
acquisition experience as well as contacts with a large number of assisted
living, medical rehabilitation, home health care and skilled nursing and
subacute facility owners and operators.
 
     The Company believes that the current fragmentation of the assisted living
industry will continue to create potential acquisition candidates for the
Company and that the competitive nature of the market will increase selling
activity as smaller, less capitalized providers face increasing competition from
larger competitors who can offer a broader range of services at more attractive
prices. The Company believes that through the reputation of its management and
the quality of the assisted living facilities it operates and is currently
developing, it will become an attractive acquirer for assisted living
facilities. The Company may pursue both strategic and single portfolio
acquisitions that meet its quality standards and present the opportunity to
increase its profitability.
 
OPERATIONS
 
  CENTRALIZED CORPORATE MANAGEMENT
 
     The Company's corporate and other administrative functions are centralized
so that the facility-based management and staff can focus on resident care. The
Company's corporate office, located in Mechanicsburg, Pennsylvania, is generally
responsible for: (i) establishing Company-wide policies and procedures relating
to, among other things, resident care and operations; (ii) performing accounting
and finance functions; (iii) developing and implementing employee training
programs and materials; (iv) coordinating human resources; (v) food services
functions; (vi) coordinating marketing functions; and (vii) providing strategic
direction. In addition, financing, development, construction and acquisition
activities, including feasibility and market studies, facility design,
development and construction management are conducted by the Company's corporate
development and acquisition teams.
 
     The Company manages the operations of each of its facilities through
standardized management reporting and centralized control of capital
expenditures and the purchase of larger and more frequently used supplies.
Facility expenditures are monitored by regional operations teams headed by one
of the Company's Regional Vice Presidents who are responsible for the financial
performance of the facilities in their region. The operational activities of the
Company's assisted living facilities are directed by the Company's Senior Vice
President -- Outlook Pointe(R) Division, its Vice President -- Missouri
Division, its Vice President -- Keystone Division and its Vice
President -- Rehab Therapy Division, who are responsible, with the regional Vice
Presidents, for the opening and operation of these facilities.
 
  COMMUNITY-BASED MANAGEMENT
 
     An assisted living Community Director or skilled nursing Facility
Administrator manages the operations at each assisted living or skilled nursing
facility, including oversight of the quality of care, delivery of resident
services, and monitoring of financial performance, and is responsible for all
personnel, including assisted living,
                                       15
<PAGE>   16
 
food service, maintenance, activities, security, housekeeping, and, where
applicable, nursing. Directors and Administrators are compensated based on
attaining certain quality service goals and on the financial goals of the
facility. In most cases, each facility also has department managers that direct
nursing or care services, dining services, activities, transportation,
environmental, housekeeping and marketing functions.
 
     In its assisted living communities, the Company has adopted the concept of
a multi-task work environment whereby each employee's responsibilities span a
number of traditional job descriptions. For example, an employee may, during the
course of a day, provide housekeeping, food delivery service, activities, and
assistance with ADLs to residents. On-site care managers and residents'
assistants provide most of the actual resident care in conjunction with a small
support team consisting of a nurse, a housekeeper, a maintenance helper, an
administrative coordinator and a small dining service team.
 
     The Company actively recruits personnel to maintain adequate staffing
levels at its existing facilities, as well as additional staff for new or
acquired facilities, prior to opening. The Company has adopted comprehensive
recruiting and screening programs for management for positions that utilize
personnel profiling, corporate office interviews, and background checks. The
Company offers system-wide training and orientation for its resident care
employees, department level managers, and executive staff at the facility level
through Company-sponsored programs.
 
  QUALITY ASSURANCE AND TRAINING
 
     The Company's quality assurance program is designed to achieve, maintain
and enhance high performance in the area of resident and family satisfaction,
employee development, fiscal responsibility and corporate integrity, along with
continuous internal quality improvement. Corporate office staff oversee the
implementation of the quality assurance program at each of the Company's
facilities. Resident and family participation is encouraged and feedback is
sought through surveys, focus groups, resident councils and discussions with
family members. The Company provides intensive training programs to ensure that
its quality standards are achieved by its employees at each facility, and
strives to meet employees' needs and provide a respectful and cooperative
environment. Employees are responsible for handling finances with efficiency and
integrity and adhere to an ethical code of conduct. Internal standards for all
areas of service have been established which the Company believes meet or exceed
those of regulatory agencies. Monitoring and improving internal performance in
regard to these standards is facilitated by cross-functional performance
improvement teams. Additionally, inspections of each facility are conducted
regularly by corporate staff who review all aspects of operations, care and
services provided.
 
  INTEGRATION OF ACQUIRED FACILITIES
 
     The Company has developed a plan and organization structure to begin a
complete integration of each acquired facility immediately following its
acquisition. An interdisciplinary integration team begins conversion of
financial and information systems at closing, with operations, marketing and
human resource policies and procedures converted during the first six months of
operation.
 
  MARKETING
 
     The Company's marketing program has been developed by the corporate
marketing staff under the direction of the Company's Vice President of Sales and
Marketing and is modified in accordance with the needs of each region in which
the Company operates. Marketing focuses on creating awareness of the Company and
its services among prospective residents, their families, professional referral
sources and other key decision makers. Marketing efforts are implemented on a
regional and local level under the supervision of the corporate marketing staff.
Corporate office personnel develop the overall marketing strategies for each
facility, produce all marketing materials, maintain marketing databases, oversee
direct mailings, place all media advertising and assist facility personnel in
the initial development and continuing refinement of marketing plans. The
Company conducts pre-construction surveys of age- and income-qualified
prospective residents and their families living within a certain radius of the
proposed assisted living construction site to ensure that the Company
understands the needs and demands of a particular marketplace. Focus groups are
organized during the pre-opening phase to collect data
 
                                       16
<PAGE>   17
 
from key community representatives about seniors' needs and to inform them of
the Company's approach to senior care.
 
     Before opening a new assisted living facility, the Company contacts
referral sources and conducts marketing programs that generate public awareness
beginning with the start of construction and intensify several months prior to
opening of the facility. An on-site Marketing Coordinator and Community Director
are at the facility approximately four and six months, respectively, prior to
the opening of the facility and are supported by the Company's corporate
marketing department. The Company generally expects occupancy of newly developed
assisted living facilities to reach targeted occupancy of 92% within 10 to 21
months after opening, depending on the size of the facility.
 
     Once a facility opens, the Company believes that satisfied residents and
their families are its most important referral sources. The Company's emphasis
on high quality services and resident satisfaction create a strong referral base
in the surrounding community. In addition, the Company focuses on developing the
reputation of the facilities for quality care and its Balanced Gold(R) program
among potential referral sources.
 
     In markets where the Company offers multiple components of the Balanced
Care Continuum, such as assisted living, outpatient rehabilitation services,
skilled nursing, subacute care, home care and hospice services, a network
approach to sales and marketing is utilized. A community-based sales force that
understands the health care environment of each market, including competitor
positioning, referral patterns and the maturity of managed care, facilitates
cross selling of the Company's services. Direct sales efforts increase referrals
for all services through the account management of professional referral sources
such as physicians, hospitals, and managed care plans.
 
  MANAGEMENT INFORMATION SYSTEMS
 
     The Company's Information Systems department, under the direction of the
Company's Vice President of Corporate Services, develops, implements and
maintains management and financial systems which enable the Company to closely
monitor operating costs and quickly distribute financial and operating
information to appropriate levels of management in a cost efficient manner. The
Company uses flexible input methods and communications to allow for distributed
data collection and analysis. Management believes that its current data systems
are adequate for current operations and provide the flexibility to accommodate
the planned growth of its operations without disruption or significant
modification to existing systems through fiscal year 1999. The Company plans to
begin upgrading the existing financial system during fiscal year 1999 to
accommodate future growth. While cost estimates have not been finalized, the
system upgrade will involve expansion of the Company's systems staff and a
substantial financial commitment.
 
     The Company uses high quality hardware and operating systems from current
and proven technologies to ensure reliability and optimum system performance. In
an effort to evaluate these systems for year 2000 issues, the Company has formed
an oversight committee. This committee has performed an inventory and risk
assessment of the Company's internal operating systems, as well as an inventory
of third party relationships and their impact on the Company. Based upon the
committee's review, the Company has determined that third party relationships
provide the highest risk related to year 2000 issues. The third party
relationships deemed most critical are the Company's banking relationships and
its relationships with third party intermediaries for nursing home
reimbursement. The Company is in the process of developing contingency plans to
address these critical relationships. The oversight committee will also oversee
the testing of any internal information technology systems which do not contain
embedded software. The testing of these systems and the time frame for
completion are in the planning stages. For those non-critical systems which
cannot be readily tested, the Company will inquire of third party vendors as to
the status of year 2000 compliance within these systems. Based upon the
Company's progress to date in addressing year 2000 issues, management does not
expect these issues to have a material impact on financial position, results of
operations or cash flows in future periods, including the cost of remediation.
 
                                       17
<PAGE>   18
 
COMPETITION
 
     The Company is one of the 50 largest providers of assisted living services
in the United States in terms of resident capacity, according to the Largest
Providers Annual Survey 1998, published by KPMG Peat Marwick LLP. The health
care industry is highly competitive and the Company believes that competition in
its current and targeted markets will continue to increase. There are currently
few regulatory and other barriers to entry in the assisted living industry. The
Company faces competition for residents from numerous local, regional and
national providers of facility-based assisted living and long-term care,
including skilled nursing facilities, as well as medical rehabilitation and home
health care providers. Many of the Company's present and potential competitors
are significantly larger or have greater financial resources than those of the
Company. The Company believes the primary competitive factors in the senior care
industry are: (i) reputation for, and commitment to, high quality care; (ii)
quality of support services offered (such as home health care and food
services); (iii) price of services; (iv) physical appearance and amenities
associated with the facilities; and (v) location. Because seniors tend to choose
senior living facilities near their homes, the Company's principal competitors
are other senior living and long-term care facilities in the same geographic
areas as the Company's facilities. The Company also competes with other health
care businesses with respect to attracting and retaining nurses, technicians,
aides, and other high quality professional and non-professional employees and
managers. Additionally, in implementing its growth strategy the Company will
face competition for the development and acquisition of assisted living, skilled
nursing and related senior care facilities.
 
     Management believes that the Company's competitive position in its targeted
markets is enhanced by the disciplined practices applied to market selection.
The Company utilizes an in-house developed model for market analysis to
determine the net bed need expected for each community. This analysis considers
such factors as population, income and age demographics and the number of
competitor beds in the market to arrive at the demonstrated net bed need,
excluding the facility proposed by the Company. A net bed need of at least three
times the size proposed is necessary in order for the Company to proceed to
enter that market. Also considered are the opportunity for the Company to offer
a range of services comprising the senior living and health care continuum, the
sophistication of competitor facilities, and the ability to maximize management
resources in a specific market by clustering its development and operating
activities.
 
GOVERNMENT REGULATION
 
     The health care industry is subject to extensive federal, state and local
regulation. The various layers of governmental regulation affect the Company's
business by controlling its growth, requiring licensure or certification of its
facilities, regulating the use of its facilities and controlling reimbursement
to the Company for services provided. Licensing, certification and other
applicable governmental regulations vary from jurisdiction to jurisdiction and
are revised periodically. It is not possible to predict the content or impact of
future legislation and regulations affecting the health care industry.
 
     Laws and regulations governing skilled nursing facilities are particularly
extensive and establish minimum standards in a variety of areas, including
physical plant specifications; personnel training and education; the level of
nursing, physician, rehabilitation, social, dietary and recreational services to
be provided; and safety and evacuation plans. The Omnibus Reconciliation Act of
1987 ("OBRA") significantly redefined the scope and nature of federal
regulations governing skilled nursing facilities certified to participate in the
Medicare and Medicaid programs, with an emphasis on resident rights and quality
of care. Skilled nursing facilities are also generally subject to and must
comply with state and/or local building and fire codes. In addition, some
states, including Missouri, have certificate of need laws applicable to skilled
nursing facilities. Certificate of need laws require that a state agency
determine that a sufficient need exists for a facility before it may be opened.
These laws may also regulate permitted capital expenditures and expansion of
services and beds.
 
     Skilled nursing facilities, like other health care providers, are
periodically inspected by governmental agencies with authority over licensing
and certification for participation in the Medicare and Medicaid programs. New
survey and certification requirements under OBRA for participation in the
Medicare and Medicaid programs became effective in 1995, significantly changing
the process of surveying long term care facilities. These requirements
established a graduated system of penalties and remedies to match the severity
of the deficiency.
 
                                       18
<PAGE>   19
 
Facility deficiencies may result in the imposition of fines and penalties, a
need to undertake corrective actions, a temporary moratorium on admissions
pending correction of deficiencies, and could result in decertification from the
Medicare and Medicaid programs or loss of licensure and closure of the facility.
To date, these regulations have not had a material adverse effect on the
Company's operations. In July 1998, the Clinton Administration unveiled a series
of administrative and proposed legislative reform measures designed to assure
the delivery of quality care in nursing facilities. Included among these reforms
is a requirement that survey inspections, currently conducted by state agencies
to assess compliance with Medicare conditions of participation, occur more
frequently and less predictably and that sanctions be imposed more rapidly. The
Clinton Administration has further stated that if the state agencies are unable
to enforce the quality measures effectively, the Health Care Financing
Administration would contract with other organizations for survey and
certification services.
 
     The federal government, through the Health Care Financing Administration,
has proposed revisions to the conditions for participation in the Medicare
program applicable to home health care providers. These revised conditions, as
proposed, focus on matters such as patient rights, outcomes of care, patient
assessment, care planning, and quality assessment. The Company is not able to
predict at this time what the content of the final revised conditions will be or
the impact the final conditions may have on the Company's home health care
services. In response to concerns voiced by Congress and home health providers,
the Health Care Financing Administration recently suspended compliance with this
rule until at least February 15, 1999, pending the issuance of a new final rule.
 
     The Company's assisted living facilities are subject to regulation by
various state and local agencies. There are currently no federal laws or
regulations specifically governing assisted living facilities. State
requirements relating to the licensing and operation of assisted living
facilities vary from state to state; however, most states regulate many aspects
of a facility's operations, including physical plant requirements; resident
rights; personnel training and education; requisite levels of resident
independence; administration of medications; safety and evacuation plans; and
the level and nature of services to be provided, including dietary and
housekeeping. In most states, assisted living facilities must also comply with
state and local building and fire codes and certain other licenses or
certifications, such as a food service license, may be required. In addition, in
several states, including Arkansas, Missouri, Kentucky and New Jersey,
certificate of need laws apply to assisted living facilities. North Carolina
imposed a 12-month moratorium, effective August 28, 1997, on the addition of
adult care home beds in the state, subject to certain exceptions. The exceptions
include, among others, an exception for certain development or expansion plans
submitted to the state prior to the date of the moratorium. The Company's
development project in Greensboro, North Carolina is not subject to the
moratorium since it meets the requirements of this exception. Although the
moratorium has expired, it is anticipated that the moratorium will be reenacted
retroactively to the date of expiration through August 26, 1999. Assisted living
facilities are subject to periodic survey by governmental agencies with
licensing authority. In certain circumstances, failure to satisfy survey
standards could result in a loss of licensure and closure of a facility.
 
     Because assisted living facilities historically have not been considered as
traditional health care entities and government and private insurers have not
reimbursed providers for assisted living services, these facilities have not
been subject to the degree of regulation which governs nursing homes and other
health care providers. As assisted living emerges as a cost-effective
alternative to nursing facility care, it is anticipated that assisted living
facilities could become subject to more extensive regulation, particularly in
the areas of licensure and reimbursement. The content of such regulations, the
extent of any increased regulation and the impact of any such regulation on the
Company cannot be predicted at this time and there can be no assurance that such
regulations will not adversely affect the Company's business.
 
     As a Medicare and Medicaid provider with respect to its skilled nursing
facilities and rehabilitation and home health care operations, the Company is
subject to a variety of laws regulating relationships among health care
facilities, providers and physicians. Among these laws is the federal "Stark
Act" legislation which prohibits, with some exceptions, a physician from
referring patients for certain designated health care services, including home
health care and certain rehabilitation services, to entities in which the
physician or a member of his or her family has a financial interest. In early
1998, proposed regulations relating to the Stark Act were issued. The Company is
not able to predict at this time what the content of the final regulations will
be or the impact the final regulations may have on the Company's business and
operations. The Company, as a Medicare and Medicaid
                                       19
<PAGE>   20
 
provider, is also subject to federal anti-kickback laws which prohibit the
payment or receipt of any remuneration in return for, or to induce, the referral
of patients for items or services that are paid for, in whole or in part, by
Medicare or Medicaid. Violation of these provisions could result in civil or
criminal penalties, as well as exclusion from participation in the Medicare and
Medicaid programs. There are currently a number of federal initiatives being
undertaken to increase enforcement of the federal anti-kickback law and other
antifraud and abuse provisions. The federal government, through the Office of
Inspector General, recently released a model compliance plan for home health
agencies. The model plan identifies a number of risk areas where home health
agencies need to pay particular attention to their practices and further
requires the home health agency to exercise oversight over parties with which it
does business. The Company has established a corporate compliance code of
conduct relating to, among other things, resident and patient care, and fraud
and abuse/legal policy and procedures. Additionally, the Balanced Budget Act of
1997 (the "Budget Act"), signed into law on August 5, 1997, contains a number of
antifraud provisions designed to further fight abuse and enhance program
integrity. Certain states have also enacted anti-kickback laws patterned on the
federal law. The Company believes that its operations are in substantial
compliance with the laws applicable to Medicare and Medicaid providers,
including antifraud and abuse provisions; however, there can be no assurance
that the administrative or judicial interpretation of such laws or the
regulations promulgated thereunder will not in the future have a material
adverse impact on the Company's operations or that the Company will not be
subject to an investigation which would require a significant investment of time
and manpower by the Company. Assisted living facilities may be eligible to
participate as Medicaid providers and receive reimbursement through Medicaid
waiver programs and managed care plans. If the Company elects to become a
Medicaid provider with respect to its assisted living facilities, such entities
would become subject to all of the requirements applicable to Medicaid
providers, including the antifraud and abuse legislation.
 
     The Company derives a significant portion of its revenues from federal and
state reimbursement programs. All of the skilled nursing facilities operated by
the Company are certified to receive benefits under Medicare and Medicaid, and
the Company's home health care agency is certified under Medicare. The
reimbursement methodology for a variety of health care providers is changing
significantly as a result of provisions contained in the Budget Act, which
provisions could materially impact the Company's operations and financial
condition. The Budget Act provides for the establishment of a prospective
payment system ("PPS") for skilled nursing services (rather than the
retrospective cost-based methodology in place prior to July 1, 1998). The PPS
for skilled nursing facilities is being phased in over three cost reporting
periods, commencing on or after July 1, 1998. During the transition period, the
payment rate is based on a percentage blend of a facility-specific rate and a
federal per diem rate. Once the PPS is fully implemented, skilled nursing
facilities will be paid a federal per diem rate for covered services, which
include routine and ancillary services and most capital-related costs. In
conjunction with PPS, consolidated billing for Medicare Part A Services will be
required for skilled nursing facilities. Under consolidated billing for Medicare
Part A Services, facilities must bill Medicare for all of the services residents
receive, including all therapy services. The Company's skilled nursing
facilities began utilizing this new rate methodology on July 1, 1998. The
Company estimates the new Medicare reimbursement rates will reduce Medicare
revenues at the skilled nursing facilities by approximately $8,000,000 from
fiscal 1998 levels. To maximize operating results under the new regulations the
Company has embarked upon a program to reduce costs and manage acuity levels.
These steps included: (i) a renegotiation of therapy service contracts; (ii) a
reduction of nursing costs through managing hours worked to patient acuity;
(iii) evaluation of the need for high-cost programs; and (iv) consolidating and
eliminating certain non-patient related services. These operational changes are
expected to reduce operating costs by approximately $6,500,000 in fiscal 1999
from fiscal 1998 levels. The net result of these changes is an expected decline
of $1,500,000 in operating and pre-tax income in fiscal 1999 compared to fiscal
1998. These are estimates based on the volume of Medicare business and the
acuity of patients experienced during fiscal 1998. Actual results in fiscal 1999
could vary depending upon, among other things, the number and acuity of Medicare
patients admitted, and the Company's experience with programmatic management and
cost control. The Company continues to evaluate the impact of the Budget Act
upon future operating results.
 
     The Budget Act additionally establishes a PPS for home health care services
pursuant to which all services which are currently paid on a reasonable cost
basis will be paid on a prospective basis. The PPS for home health care services
is to begin October 1, 1999, with a transition period not to exceed four years.
Until such time as
                                       20
<PAGE>   21
 
there is full implementation of the PPS for home health care services, the
Budget Act imposes a number of interim modifications on reimbursement, including
a reduction in per visit cost limits. The interim payment system implemented by
the Health Care Financing Administration is effective retroactive to October
1997 and has resulted in required repayments to the federal government by a
number of home health agencies. Reimbursement of these provider overpayments and
the imposition of per visit cost limits have created significant financial
hardship for providers, with a number of home health providers having ceased
operations. In an effort to offset the hardship caused by the repayment
obligation, the Health Care Financing Administration has authorized repayments
over a 12-month period, rather than requiring a lump sum payment. The Budget Act
also modifies reimbursement rates for rehabilitation agencies and outpatient
therapy providers. It is not possible to predict at this time the impact that
any or all these changes in reimbursement methodology may have on the business,
results of operations or financial condition of the Company, though the reform
measures are intended to reduce the amounts paid by the government for these
services.
 
     Medicaid programs currently exist in all of the states in which the Company
has skilled nursing facilities and also apply in some of the states where the
Company has assisted living facilities. While these programs differ in certain
aspects from state to state, they are all subject to requirements imposed by the
federal government, which provides approximately 50% of the funds available
under these programs. In the states in which the Company operates skilled
nursing facilities, payments are based upon specific cost reimbursement formulas
established by that state, which are generally based on historical costs with
adjustment for inflation.
 
     For Fiscal 1998, the Company derived approximately 43% of its gross patient
revenues from Medicare and approximately 37% of its gross patient revenues from
Medicaid. For the year ended June 30, 1997, the Company derived approximately
38% of its gross patient revenues from Medicare and approximately 38% of its
gross patient revenues from Medicaid. The Company had no revenues from Medicare
or Medicaid for the year ended June 30, 1996.
 
     Both governmental and private-payor sources have instituted cost
containment measures designed to limit payments made to long-term health which
adversely affect reimbursements to the Company. Furthermore, although federal
regulations do not recognize state budget deficiencies as a legitimate ground to
curtail funding of their Medicaid cost reimbursement programs, states have
nevertheless curtailed such funding in the past. No assurance can be given that
states will not do so in the future or that the future funding of Medicaid
programs will remain at levels comparable to present levels.
 
     Government reimbursement programs are also subject to statutory and
regulatory changes, administrative rulings and interpretations, determinations
by reimbursement intermediaries, and governmental funding restrictions, all of
which may materially increase or decrease the rate of program payments to health
care providers operated by the Company. In addition, there can be no assurance
that facilities or other providers owned, leased or managed by the Company, now
or in the future, will initially meet or continue to meet the requirements for
participation in such programs.
 
     The Company believes the structure and composition of government regulation
of health care will continue to change and, as a result, it regularly monitors
developments in the law. The Company expects to modify its agreements and
operations from time to time as the business and regulatory environment changes.
While the Company believes it will be able to structure all its agreements and
operations in accordance with applicable law, there can be no assurance that its
arrangements will not be successfully challenged.
 
     Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access by disabled persons. While the Company believes that
its properties are substantially in compliance with present requirements or are
exempt therefrom, if required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by the Company. Further, legislation may
impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.
 
                                       21
<PAGE>   22
 
     The Company is subject to various federal, state and local environmental
laws and regulations. Such laws and regulations often impose liability whether
or not the owner or operator knew of, or was responsible for, the presence of
hazardous or toxic substances. The costs of any required remediation or removal
of these substances could be substantial and the liability of an owner or
operator as to any property is generally not limited under such laws and
regulations and could exceed the property's value and the aggregate assets of
the owner or operator. The presence of these substances, or failure to remediate
such contamination properly, may also affect adversely the owner's ability to
sell or rent the property, or to borrow using the property as collateral. Under
these laws and regulations, an owner, operator or an entity that arranges for
the disposal of hazardous or toxic substances, such as asbestos-containing
materials, at the disposal site, may also be liable for the costs of any
required remediation or removal of the hazardous or toxic substances at the
disposal site. In connection with the ownership or operation of its properties,
the Company could be liable for these costs, as well as certain other costs,
including governmental fines and injuries to persons or properties.
 
LIABILITY AND INSURANCE
 
     Providing health care services involves an inherent risk of liability.
Participants in the senior living and health care services industry are subject
to lawsuits alleging negligence or related legal theories, many of which may
involve large claims and result in the incurrence of significant defense costs.
The Company currently maintains property, liability and professional medical
malpractice insurance policies for the Company's owned, leased and managed
facilities with such coverages and deductibles which management believes are
prudent, adequate and in keeping with industry practice. The Company also has an
umbrella excess liability protection policy in the amount of $5.0 million to
$10.0 million per location. In addition, the Company maintains policies for
employee practices and officers and directors liability in the amounts of $1.0
million and $10.0 million respectively. There can be no assurance that a claim
in excess of the Company's insurance will not be asserted. A claim against the
Company not covered by, or in excess of, the Company's insurance, could have a
material adverse affect on the Company. The Company's insurance policies are
reviewed annually. There can be no assurance that the Company will be able to
obtain liability insurance in the future or that, if such insurance is
available, it will be available on acceptable terms.
 
EMPLOYEES
 
     As of June 30, 1998, the Company had approximately 2,400 employees. None of
the Company's employees is represented by a union. The Company considers its
employee relations to be good. Although the Company believes it is able to
employ sufficient skilled personnel to staff the facilities it operates or
manages, a shortage of skilled personnel in any of the geographic areas in which
it operates could affect adversely the Company's ability to recruit and retain
qualified employees and its operating expenses.
 
RISK FACTORS
 
     This Annual Report on Form 10-K and the 1998 Annual Report to Stockholders
contain various "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements, which represent the
Company's expectations or beliefs concerning various future events, include the
following: statements concerning anticipated effects on earnings, cost savings
and operations of the Company; net cash flow; industry trends; certain expected
capital expenditures; computer software modification and replacement; the
outcome of any government inquiries, litigation or other proceedings; the impact
of government regulation; and future environmental costs. These statements are
based on current expectations that involve a number of risks and uncertainties,
including the following:
 
     Limited Operating History. The Company was formed in April 1995 and has a
limited operating history. The Company incurred losses of $909,000 and
$4,492,000 for its fiscal years ended June 30, 1996 and 1997, respectively, and
had a net income of $3,575,000 for fiscal 1998. As of June 30, 1998, the Company
had an accumulated deficit of $1,836,000. The Company's newly developed assisted
living facilities are expected to incur operating losses until they achieve
break-even occupancy levels of approximately 78%. The Company expects to achieve
targeted occupancy levels of approximately 92% approximately 10 to 21 months
after opening,
 
                                       22
<PAGE>   23
 
depending on the size of the facility. In addition, the Company's acquired
operations, even if profitable when acquired, may incur operating losses pending
their integration into the Company's business. Several of the facilities that
have been acquired by the Company experienced operating losses in the fiscal
years ended June 30, 1997 and 1998. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are incorporated by reference from the Company's 1998 Annual
Report. Accordingly, there can be no assurance that the Company will not
continue to incur losses. Failure to achieve profitability could have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
     Implementation of Strategies. To date, the Company's growth has been
primarily attributable to acquisitions of assisted living and skilled nursing
facilities. The Company's first Outlook Pointe(R) signature series assisted
living facility opened in May 1997. The Company has opened 11 additional Outlook
Pointe(R) signature series assisted living facilities through June 30, 1998. The
Company intends to develop the Balanced Care Continuum through the development
and selective acquisition of additional assisted living facilities and, where
appropriate, skilled nursing facilities, as well as the provision of medical
rehabilitation, home health care, Alzheimer's services and skilled nursing
services. The Company expects that the number and types of facilities and
business operations that it owns, operates or manages will increase
substantially if the Company is successful in implementing its strategies.
Implementation of the Company's strategies will place a significant burden on
the Company's management resources and require the development, implementation
and continual enhancement of sufficient operational, resident care, financial
and management information systems. Successful implementation of the Company's
strategies will also depend on its ability to carry out its development plans
and to effect acquisitions and alliances and to attract, motivate and retain
management, professional, marketing and other key personnel. There can be no
assurance that its strategies can be implemented successfully or that sufficient
management resources and operational, resident or patient care, financial and
management information systems will be available. If the Company is unable to
manage its growth or to implement its strategies effectively, its business,
results of operations and financial condition could be materially and adversely
affected.
 
     Need for Additional Capital. The Company will need to obtain substantial
additional capital resources to fund its development and acquisition strategy as
well as its working capital needs to fund the growth in its operations. The
Company plans to develop more than 40 additional Outlook Pointe(R) facilities by
June 30, 1999. The estimated cost to complete these facilities ranges from $350
to $400 million which substantially exceeds the financial resources currently
available to the Company. In addition, the Company estimates that the planned
development projects for the fiscal year ended June 30, 1999 ("Fiscal 1999")
will require approximately $70 million of working capital commitments from
Operators/Lessees during their initial occupancy periods, which are expected to
occur during the fiscal years ended June 30, 2000 and 2001 ("Fiscal 2001"). The
Company also estimates that it will require approximately $100-200 million
through Fiscal 2001 if it exercises its options to purchase the stock or assets
of Operators/Lessees for all projects developed under this structure, through
and including Fiscal 1999 development projects. Accordingly, the Company's
future growth will depend on its ability to obtain additional development,
acquisition and working capital financing on acceptable terms. The Company may
seek additional financing through public or private financing sources, including
equity, debt or lease financing. Financings effected through the issuance of
securities could result in substantial dilution to holders of Common Stock.
There can be no assurance that adequate funding will be available as needed or
on terms acceptable to the Company. Insufficient development, acquisition and
working capital financial resources could result in the Company delaying or
eliminating all or some of its development projects and acquisition plans or
otherwise slowing the growth of its operations, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," which are
incorporated by reference from the Company's 1998 Annual Report.
 
     Assisted Living Facility Construction and Occupancy Risks. To date, the
Company has developed, built and opened 12 of its Outlook Pointe(R)signature
series assisted living facilities. The Company plans to open approximately 63
Company-designed assisted living facilities with an aggregate capacity of
approximately 5,300 residents by June 30, 2000. Achievement of these goals will
depend upon a number of factors, including the Company's ability to obtain
adequate financing on acceptable terms, to obtain zoning, land use, building,
                                       23
<PAGE>   24
 
occupancy, licensing and other required governmental permits on a timely basis,
and to control construction costs and project completion schedules. In addition,
numerous factors outside the Company's control will impact the successful
implementation of its development plans, including competition for site
acquisitions, shortages of, or the inability to obtain, labor or materials,
changes in applicable laws or regulations or in the method of applying such laws
and regulations, the failure of general contractors or subcontractors to perform
under their contracts, strikes and adverse weather. There can be no assurance
that the Company will not encounter delays in its development program or that it
will be successful in developing and constructing planned or additional assisted
living facilities or that completed facilities will achieve targeted occupancy
rates or otherwise be economically successful. The Company's inability to
achieve its development plans or the delay of those plans could have a material
adverse effect on its business, results of operations and financial condition.
 
     Acquisition Risks; Difficulties of Integration. To date, the Company's
growth has been primarily attributable to acquisitions. The Company may continue
to expand its business through strategic acquisitions. Pursuit of an acquisition
strategy entails the risks inherent in assessing the value, strengths,
weaknesses, contingent or other liabilities and potential profitability of
acquisition candidates and in integrating the operations of acquired businesses.
The Company's success in effecting acquisitions will depend on numerous factors,
including its ability to identify suitable acquisition candidates and negotiate
acceptable purchase terms, the competition for acquisitions, the Company's
ability to finance acquisitions, and the availability of appropriate government
licenses and approvals. Successful integration of acquired businesses will
depend on the Company's ability to effect any required changes in operations or
personnel, and may require renovation or other capital expenditures or the
funding of unforeseen liabilities. There can be no assurance that the Company
will consummate future acquisitions, that operations of acquired facilities can
be successfully integrated or that acquired operations will be profitable.
 
     Substantial Fixed Charges; Pledge of Assets. The Company leases most of its
facilities under long-term operating leases. Lease and debt service obligations
of the Company for Fiscal 1998 aggregated approximately $16 million, including
the repayment of the mortgage relating to the Wisconsin facilities of
approximately $5 million. Leases generally provide for rent increases and
require the Company to pay taxes, utilities and insurance obligations. The
Company intends to continue to finance the development of its properties
primarily through operating leases and thus expects that the amount of its
lease-related and debt service obligations will increase as the Company pursues
its growth strategy. As a result, an increasing portion of the Company's cash
flow will be devoted to lease payments and debt service, which will reduce the
amount of cash flow otherwise available to support the Company's growth. Such
leases and mortgages also typically contain rent coverage and other financial
covenants. There can be no assurance that the Company will generate sufficient
cash flow from operations to cover required lease and debt service payments or
that the financial performance of the Company or of particular subsidiaries or
facilities will be adequate to meet applicable financial covenants. Any payment
or other default could cause a lender to foreclose upon any collateral securing
the indebtedness or, in the case of an operating lease, could terminate the
lease, resulting in a loss of revenue and asset value to the Company. In certain
cases, indebtedness secured by real estate of a facility is also secured by a
pledge of the Company's operating interest in the facility and, in certain other
cases, indebtedness and facility leases are secured by a pledge of stock of
certain of the Company's subsidiaries. Since most of the Company's leases and
financing agreements contain cross-default and cross-collateralization
provisions, a default by the Company on one of its payment obligations could
adversely affect a significant number of the Company's other obligations and
properties. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," which is incorporated
by reference from the Company's 1998 Annual Report.
 
     Government Regulation. The health care industry is subject to extensive
federal and state regulation and frequent regulatory change. Federal, state and
local laws governing long-term care and other services provided to seniors
address, among other things, adequacy of medical care, distribution of
pharmaceuticals, operating policies, licensing and certificate of need
requirements. Long-term care facilities are also periodically inspected to
assure continued compliance with various standards and licensing requirements
under state law. There are currently no federal laws or regulations specifically
defining or regulating assisted living facilities. However, while many states
have not yet enacted specific assisted living laws or regulations, the Company's
assisted living
 
                                       24
<PAGE>   25
 
facilities are subject to state regulation, licensing, approvals by state and
local health, welfare and social service agencies and other regulatory
authorities and compliance with building codes and environmental laws. In
addition, in several states, including Arkansas, Missouri, New Jersey, Kentucky
and North Carolina, certificate of need laws apply to assisted living
facilities. Certificate of need or similar laws require that a state agency
approve certain acquisitions and determine that a need exists for certain
services, the addition of beds and capital expenditure or other changes. North
Carolina imposed a moratorium on the addition of adult care home beds, subject
to certain exceptions where binding commitments have been made to establish or
expand an adult care home facility. The moratorium has expired, but it is
expected that the moratorium will be reenacted and remain effective through
August 26, 1999. When the issuance or renewal of certificates of need or other
similar government approvals are required, changes in existing laws or adoption
of new laws could adversely affect the Company's development or acquisition
strategy and/or its operations if it is unable to obtain such certificates of
need approvals or renewals thereof. Also, health care providers have been
subjected to increasing scrutiny under anti-trust laws as the integration and
consolidation of the health care industry increases and affects competition.
Regulation of the assisted living industry is evolving. The Company cannot
predict the content of new regulations and their effect on its business. There
can be no assurance that regulatory or other legal developments will not affect
adversely the Company's business, results of operations and financial condition.
 
     Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements (including employment
or service contracts) between health care providers and others who may be in a
position to refer or recommend patients or services to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of a particular provider of health care items or services.
The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to
certain contractual relationships between health care providers and sources of
patient referral. A number of similar state laws exist which often have not been
interpreted by courts or regulatory agencies. The Department of Health and Human
Services periodically issues "special fraud alerts" which address specific areas
of concern. The federal government, through the Office of Inspector General,
recently released a model compliance plan for home health agencies. The model
plan identifies a number of risk areas and requires the home health agency to
exercise oversight over parties with which it does business. Federal "Stark"
legislation prohibits, with limited exceptions, the referral of patients for
certain services, including home health care services, physical therapy and
occupational therapy, by a physician to entities in which they have an ownership
or financial interest. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or
suppliers from participating in the Medicare and Medicaid programs.
Additionally, the Balanced Budget Act of 1997 (the "Budget Act"), signed into
law on August 5, 1997, contains a number of anti-fraud provisions designed to
further fight abuse and enhance program integrity. Furthermore, some states
restrict certain business or fee relationships between physicians and other
providers of health care services. The Company believes that its operations are
in substantial compliance with the laws applicable to Medicare and Medicaid
providers, including anti-fraud and abuse provisions; however, there can be no
assurance that the administrative or judicial interpretation of such laws or the
regulations promulgated thereunder will not in the future have a material
adverse impact on the Company's operations or that the Company will not be
subject to an investigation which would require a significant investment of time
and manpower by the Company. Assisted living facilities may be eligible to
participate as Medicaid providers and receive reimbursement through Medicaid
waiver programs and managed care plans. If the Company elects to become a
Medicaid provider with respect to its assisted living facilities, such entities
would become subject to all of the requirements applicable to Medicaid
providers, including the anti-fraud and abuse legislation. Although the Company
believes that it complies with federal and state anti-remuneration statutes at
all times, there can be no assurance that such laws will be interpreted in a
manner consistent with the practices of the Company.
 
     The Americans with Disabilities Act of 1990 requires all places of public
accommodation to meet certain federal requirements related to access and use by
disabled persons. A number of additional federal, state and local laws exist
which also may require modifications to existing and planned properties to
create access to the properties by disabled persons. While the Company believes
that its properties comply with present requirements or are exempt therefrom, if
required changes involve a greater expenditure than anticipated or must be made
more quickly than anticipated, additional costs will be incurred by the Company.
Further legislation may impose
                                       25
<PAGE>   26
 
additional burdens or restrictions relating to access by disabled persons. The
costs of complying with any new legislation could be substantial.
 
     Health Care Reform. In addition to extensive existing government health
care regulation, there are many initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of health care
services. It is not clear what proposals, if any, will be adopted, or what
effect such proposals would have on the Company's business. Various aspects of
these health care proposals, such as reductions in funding of the Medicare and
Medicaid programs, potential changes in reimbursement regulations by the Health
Care Financing Administration ("HCFA"), enhanced pressure to contain health care
costs by Medicare, Medicaid and other payors and permitting greater state
flexibility in the administration of Medicaid, could adversely affect the
Company's business, results of operations and financial condition. The Company's
skilled nursing facilities that participate in applicable state Medicaid
programs are subject to the risk of changes in Medicaid reimbursement and
payment delays resulting from budgetary shortfalls of state Medicaid programs.
The Company's current concentration of skilled nursing facilities in Missouri
and Pennsylvania exposes it to the risk of changes in Medicaid reimbursement
programs in those states. Medicare and Medicaid certification is a critical
factor contributing to the revenues and profitability of long-term care
facilities. Changes in certification and participation requirements of the
Medicare and Medicaid programs have restricted, and are likely to further
restrict, eligibility for reimbursement under those programs. Failure to obtain
and maintain Medicare and Medicaid certification at the Company's long-term care
facilities could result in a significant loss of revenue. In addition, private
payors, including managed care payors, increasingly are demanding that providers
accept discounted fees or assume all or a portion of the financial risk for
delivery of health care services, including capitated payments where the
provider is responsible, for a fixed fee, for providing all services needed by
certain patients. Capitated payments can result in significant losses when
patients require expensive treatments not adequately covered by the capitated
rate. Efforts to impose reduced payments, greater discounts and more stringent
cost controls by government and other payors are expected to continue. The
Company cannot predict what reform proposals or reimbursement limitations will
be adopted in the future or the effect any such changes will have on its
operations. There can be no assurance that currently proposed legislation,
future health care legislation, reforms or changes in the administration or
interpretation of governmental health care programs or regulations will not have
a material adverse effect on the Company's business, results of operations and
financial condition. Concern about the potential effect of various proposed
health care reforms has contributed to volatility of prices of securities of
health care companies and could similarly affect the price of the Common Stock
in the future.
 
     Geographic Concentration of Business. Currently, a substantial portion of
the Company's facilities, including facilities under construction and
development for independent Operators/Lessees, are located in Pennsylvania and
Missouri. Operating revenues attributable to the Company's business in those
states accounted for approximately 95% and 94% of the Company's total operating
revenues for the years ended June 30, 1997 and 1998, respectively. As part of
its strategy, the Company intends to continue to develop and acquire facilities
in Pennsylvania and Missouri, as well as other states. Until the Company's
operations become more geographically dispersed, the Company will be more
susceptible to downturns in local and regional economies and changes in state or
local regulation because such conditions and events could affect a relatively
high percentage of the total number of facilities currently in operation and
under development. As a result of such factors, there can be no assurance that
such geographic concentration will not have a material adverse effect on the
Company's business, results of operations or financial condition.
 
     Liability and Insurance. Providing health care services involves an
inherent risk of liability. Participants in the senior living and health care
industry are subject to lawsuits alleging negligence or related legal theories,
many of which may involve large claims and significant legal costs. The Company
currently maintains liability insurance intended to cover medical malpractice,
wrongful death and other claims which it believes is adequate and in keeping
with industry practice. However, claims in excess of the Company's insurance
coverage or claims not covered by the Company's insurance (e.g., claims for
punitive damages) may arise. A successful claim against the Company not covered
by or in excess of the Company's insurance coverage could have a material
adverse effect on the Company's business, results of operations and financial
condition. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the
 
                                       26
<PAGE>   27
 
Company's reputation and its ability to attract residents or expand its
business. The Company's insurance policies generally must be renewed annually,
and there can be no assurance that the Company will be able to obtain liability
insurance coverage in the future on acceptable terms, if at all. See
"Business -- Liability and Insurance."
 
     Competition. The senior living and health care industry is highly
competitive and the Company believes that competition in its current and
targeted markets will continue to increase. The Company faces current and
prospective competition for residents and patients and for employees from
numerous local, regional and national providers of facility-based assisted
living and long-term care, as well as rehabilitation therapy and home-based
health care providers. Many of the Company's current and potential competitors
are significantly larger and have greater financial and marketing resources than
the Company. There are currently few regulatory and other barriers to entry into
the assisted living industry. If the development of new assisted living
facilities surpasses the demand for such facilities in particular markets, such
markets could become saturated. The Company also expects to compete for
acquisitions of additional assisted living and long-term care facilities and
other senior health care operations. Competition could limit the Company's
ability to attract residents and patients and expand its business and could have
a material adverse effect on the Company's business, results of operations and
financial condition.
 
     Environmental Risks. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be held liable for the cost of removal or remediation of
certain hazardous or toxic substances that may be located on, in or under the
property. These laws and regulations may impose liability regardless of whether
the owner or operator was responsible for, or knew of, the presence of the
hazardous or toxic substances. The liability of the owner or operator and the
cost of any required remediation or removal of hazardous or toxic substances
could be substantial and is generally not limited. The presence of hazardous or
toxic substances in or under such properties could also subject the Company to
lawsuits by or liability to adjacent property owners, residents of the
facilities or employees who are injured by contamination. The presence of
hazardous or toxic substances at any property held or operated by the Company in
the future could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, if contamination is
found, it could adversely affect the Company's ability to continue to operate,
to lease or to sell the contaminated property or to use that property as
collateral for future loans.
 
     Change of Control. The acquisition by one or more related persons of 50% or
more of the Common Stock constitutes a default under certain leases between the
Company and Meditrust and may result in the termination of such leases or the
exercise of other remedies thereunder by the lessor. See "Certain Relationships
and Related Transactions", which is incorporated by reference from the Company's
Proxy Statement for its 1998 Annual Meeting of Stockholders. Other financing
arrangements of the Company contain similar change of control provisions which
may result in the termination of such arrangements or the exercise of other
remedies thereunder upon a change of control of the Company (as defined in such
arrangements).
 
     Dependence on Key Personnel. The Company's success to date has been
significantly dependent on the contributions of Brad E. Hollinger, the Company's
Chairman of the Board, President and Chief Executive Officer and one of its
founders, and the loss of his services could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company's success also depends to a significant extent upon a number of other
key employees of the Company. The Company is party to employment agreements with
Mr. Hollinger and several other key employees. The loss of the services of one
or more other key employees also could have a material adverse effect on the
Company. In addition, the Company believes that its future success will depend
in part upon its ability to attract and retain additional highly-skilled
professional, managerial, sales and marketing personnel. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in attracting and retaining the personnel that it requires for its
business and planned growth.
 
     Labor Costs. The Company competes with various health care providers and
other employers for limited qualified and skilled personnel in the markets that
it serves. The Company expects that its labor costs will
 
                                       27
<PAGE>   28
 
increase over time. Currently, none of the Company's employees is represented by
a labor union. If employees of the Company were to unionize, the Company could
incur labor costs higher than those of competitors with non-union employees. The
Company's business, results of operations and financial condition could be
adversely affected if the Company is unable to control its labor costs.
 
     No Prior Trading Market; Potential Volatility of Stock Price. Prior to
February 1998, there had been no public market for the Common Stock, and there
can be no assurance that an active trading market for the Common Stock will be
maintained. The stock market has experienced extreme price and volume
fluctuations which have particularly affected the market price for many health
care companies and which have often been unrelated to the operating performance
of these companies. The trading price of the Common Stock could also be subject
to significant fluctuations in response to variations in periodic operating
results, changes in management, future announcements concerning the Company,
legislative or regulatory changes, general trends in the industry and other
events or factors. See "Business -- Competition" and "Business -- Government
Regulation."
 
     Anti-Takeover Provisions. Certain provisions of the Company's Certificate
of Incorporation and Bylaws and Delaware law could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of such provisions allow the
Company to issue preferred stock with rights senior to those of the Common Stock
and impose various procedural and other requirements which could make it more
difficult for stockholders to effect certain corporate actions. Furthermore, the
Company has entered into certain leases, and may enter into additional financing
arrangements in the future, which provide that the Company will be in default
under such leases in the event of a change of control of the Company. See
"Change of Control."
 
                                       28
<PAGE>   29
 
                               EXECUTIVE OFFICERS
 
     The following table sets forth certain information regarding the executive
officers of the Company as of September 21, 1998:
 
<TABLE>
<CAPTION>
                NAME                     AGE                          POSITION
                ----                     ---                          --------
<S>                                      <C>    <C>
Brad E. Hollinger....................    44     Chairman of the Board, President and Chief Executive
                                                Officer and a Director
Paul A. Kruis........................    44     Chief Financial Officer
Stephen G. Marcus....................    45     Chief Operating Officer
Brian L. Barth.......................    37     Chief Development Officer
David K. Barber......................    44     Senior Vice President -- Project Management
Russell A. DiGilio...................    42     Senior Vice President -- Outlook Pointe(R)Division
Douglas L. Brewer....................    37     Senior Vice President -- Mergers and Acquisitions
Mark S. Moore........................    37     Senior Vice President -- Financial Operations
Robert J. Sutton.....................    49     Vice President -- Corporate Services and Secretary
Clint T. Fegan.......................    40     Vice President -- Corporate Controller
Diane M. Borger......................    42     Vice President and Treasurer
Robin L. Barber......................    35     Senior Counsel and Vice President -- Legal Affairs
                                                and Assistant Secretary
</TABLE>
 
     Brad E. Hollinger has served as a director and as Chairman of the Board,
President and Chief Executive Officer of the Company since its founding in April
1995. Previously he served as Executive Vice President of the Contract Service
Group of Continental Medical Systems ("CMS"), a national provider of medical
rehabilitation services and contract therapy services from 1992 to 1995. During
his eight years with CMS, Mr. Hollinger also served as Senior Vice
President/Development from 1987 to 1990, leading the development and financing
of eighteen medical rehabilitation hospitals in seven states. From 1985 to 1987,
Mr. Hollinger was Vice President of Development of Rehab Hospital Service
Corporation.
 
     Mr. Hollinger, without admitting or denying the allegations, settled a
proposed civil action brought by the Securities and Exchange Commission (the
"Commission") contending that he violated certain federal securities laws in
connection with trading in the common stock of Continental Medical Systems, Inc.
prior to its merger with Horizon Healthcare, Inc. in 1995. The Commission
approved the settlement on May 12, 1998, which consisted of the entry of an
order enjoining him from future violations of such securities laws and the
payment of $21,625, representing profits allegedly realized by him and a family
member, plus interest, and a civil money penalty in an amount equal to such
payment, plus interest.
 
     Paul A. Kruis has served as the Chief Financial Officer of the Company
since November 1997. From 1987 through 1993, Mr. Kruis served as Senior Vice
President, Treasurer and Chief Financial Officer of Rehab Systems Company
("RSC"), a company in the business of developing, building and operating
comprehensive medical rehabilitation hospitals. Mr. Kruis was a founding officer
of RSC, which was acquired by Novacare, Inc., in 1991. Mr. Kruis remained with
Novacare, Inc. in the same capacity until 1993. Prior to his employment with
RSC, Mr. Kruis was affiliated with Rehab Hospital Services Corporation from 1983
through 1987, serving as Chief Financial Officer from 1986 through 1987 and as
Assistant Corporate Controller from 1983 through 1985. During the period
following his departure from Novacare in 1993, Mr. Kruis explored the formation
of two new health care ventures, among other business activities. Mr. Kruis is a
CPA and a graduate of the College of William and Mary.
 
     Stephen G. Marcus, has served as the Chief Operating Officer of the Company
since January 1998. Prior to joining the Company, he served as President of
SelectRehab, a subsidiary of Horizon/CMS Healthcare corporation, from July 1994
to November 1997 and in various capacities during seven years with CMS,
including Senior Vice President -- Unit Management Group from January 1993
through July 1994, as Senior Vice President Development from July 1991 through
December 1992 and as Vice President -- Development from
 
                                       29
<PAGE>   30
 
August 1987 through July 1991. From April 1986 through July 1987, Mr. Marcus was
Regional Vice President - Operations for the Southeastern Regional Office of
Rehab Hospital Services Corporation ("RHSC") and, from January 1985 through
March 1986, Executive Director/Chief Executive Officer of Garden State
Rehabilitation Hospital, an RHSC facility.
 
     Brian L. Barth has served as Chief Development Officer of the Company since
October 1997. Prior to October, Mr. Barth served as Vice
President -- Acquisitions of the Company since its founding in April 19'95. He
served as Director of Medical Specialty Unit Development for Integrated Health
Services, Inc. ("IHS"), a post-acute care services company, from 1994 to 1995.
Mr. Barth's duties included oversight of the sub-acute program development for
the Northern Division. Prior to joining IHS, Mr. Barth was Director of
Development for CMS from 1987 to 1994.
 
     David K. Barber has served as Senior Vice President -- Project Management
of the Company since July 1998. Mr. Barber was previously Vice
President -- Construction and Design from June 1996 to June 1998. He previously
worked in the health care construction field as Chief Financial Officer of CCI
Construction Company from 1986 to 1995.
 
     Russell A. DiGilio has served as Senior Vice President -- Outlook Pointe(R)
Division of the Company since July 1998. Mr. DiGilio was previously Vice
President -- Assisted Living Group from April 1996 to June 1998. Prior to
joining the Company, he served as Regional Director and as Executive Director of
Operations for the Forum Group, a company engaged in providing assisted living
and retirement services, from 1987 to 1995.
 
     Douglas L. Brewer has served as Senior Vice President -- Mergers and
Acquisitions since September 1998. Prior to joining the Company, Mr. Brewer
served from April 1997 as an officer and Vice President of Select Medical
Corporation, a privately held company. Prior thereto, he served as Senior Vice
President -- Business Development of Continental Medical System's unit
management group from August 1995 until March 1997. Other capacities in which
Mr. Brewer served at Continental Medical Systems include: Vice President -Unit
Management and Director of Business Development from 1993 to 1990, respectively.
 
     Mark S. Moore has served as Senior Vice President -- Financial Operations
of the Company since July 1998. Mr. Moore was previously Senior Vice
President -- Finance and Treasurer from July 1997 to June 1998 and Vice
President -- Financial Operations from January 1997 to June 1997. Prior to
joining the Company, he served in various capacities during eight years with
CMS, including Vice President -- Rehab Hospital Group Controller from September
1996 to December 1996, as Vice President -- Eastern Division Controller from
January 1995 to August 1996 and as Regional Controller from August 1988 to
December 1994.
 
     Robert J. Sutton has served as Vice President -- Corporate Services and
Secretary of the Company since its founding in April 1995. From 1993 to 1995, he
was Vice President, Finance and Strategy, of CMS. Mr. Sutton served in a variety
of managerial positions at Marriott Corporation from 1987 to 1993, including
Vice President of Finance and Strategic Planning for Marriott Management
Services and Director of Finance of the Courtyard Hotel Division.
 
     Clint T. Fegan has served as Vice President -- Corporate Controller of the
Company since July 1998 and as Corporate Controller from July 1997 to June 1998.
From 1994 to 1997, he served as Corporate Controller of Wilmac Corporation, a
privately owned nursing home and assisted living company. From 1987 to 1994, Mr.
Fegan was a senior manager in the KPMG Peat Marwick LLP health care audit
practice.
 
     Diane M. Borger has served as Vice President -- Treasurer of the Company
since May 1998. Ms. Borger was Director of Accounting for the Company from
November 1995 until May 1998. Prior to joining the Company, she served in
various capacities during four years with Continental Medical Systems, Inc.,
including Accounting Manager -- Rehab Hospital Group from July 1993 to November
1995, as Manager of Corporate Financial Planning from March 1992 to July 1993,
and as Corporate Financial Analyst from July 1991 to March 1992. From August
1987 to July 1991 she was employed by KPMG Peat Marwick LLP and served in both
the audit practice and the healthcare consulting services practice.
 
     Robin L. Barber has served the Company as Senior Counsel and Vice
President -- Legal Affairs since September 1997, as Director -- Legal Services
from February 1996 to August 1997, and as Legal Consultant
 
                                       30
<PAGE>   31
 
from October 1995 to January 1996. Prior to joining the Company, she was in
private practice with the law firm of Eckert Seamans Cherin & Mellot LLP from
June 1993 until August 1995. Ms. Barber is the sister-in-law of Brad E.
Hollinger.
 
ITEM 2--PROPERTIES
 
     The Company's corporate office is located in Mechanicsburg, Pennsylvania.
In addition to its corporate office, as of June 30, 1998, the Company operated a
total of 37 assisted living facilities, 13 skilled nursing facilities and four
independent living facilities in Pennsylvania, Missouri, Arkansas, North
Carolina, Virginia, Ohio and Wisconsin, as well as a home health care agency in
Missouri and eight rehabilitation therapy operations located in Pennsylvania and
Arkansas. The buildings range in size from 27,000 square feet to 68,000 square
feet and are adaptable to construction on sites ranging from two to five acres.
Assuming completion of the planned divestiture of the Company's assisted living
facilities in Wisconsin, the Company will own nine, lease 27 and manage 11
senior living and health care facilities in Pennsylvania, Missouri, Arkansas,
North Carolina, Ohio and Virginia. A more detailed outline of information with
regard to the various properties that the Company owns and leases can be found
at "Operating Facilities" in Part I.
 
ITEM 3--LEGAL PROCEEDINGS
 
     The Company is involved in various legal proceedings arising in the
ordinary course of business. However, the Company is not involved in any legal
proceedings that it believes would have a materially adverse effect on its
business, financial condition or results of operations. In addition, lawsuits
may be brought against the Company, including those involving environmental and
safety and health matters. While the amounts claimed may be substantial, the
ultimate liability cannot now be determined because of the considerable
uncertainties that exist. Therefore, it is possible that the Company's course of
business and its liquidity within a particular period may be materially affected
by unforeseen circumstances. Based on facts currently available, management
believes that the disposition of these matters will not have a material adverse
effect on the financial position of the Company.
 
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
     None.
 
                                    PART II
 
ITEM 5-- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
PRICE RANGE AND HOLDERS OF COMMON STOCK
 
     The Common Stock of the Company is listed on the American Stock Exchange
and traded under the symbol "BAL." The final prospectus filed in connection with
the Company's initial public offering was declared effective on February 11,
1998 and the Common Stock began trading on the American Stock Exchange on
February 12, 1998. The following table sets forth for the fiscal periods
indicated the high and low sales prices of the Common Stock as reported on the
American Stock Exchange. No cash dividends were paid on the Common Stock during
such periods.
 
<TABLE>
<CAPTION>
                                                              HIGH    LOW
                                                              ----    ---
<S>                                                           <C>     <C>
Fiscal year ended June 30, 1998:
  3rd Quarter (from February 12, 1998)......................  $10 5/8 $6 3/4
  4th Quarter...............................................   10      6 3/4
</TABLE>
 
     On September 18, 1998, the last reported sales price for the Common Stock
as reported on the American Stock Exchange was $6.25 per share. The number of
holders of record of the Common Stock on September 18, 1998 was approximately
105 (approximately 1,833 beneficial owners).
 
                                       31
<PAGE>   32
 
DIVIDENDS
 
     The Company has not paid or declared any dividends on its capital stock
since its inception. The Company intends to retain earnings for development of
its business and will not distribute them to stockholders as dividends. The
declaration and payment by the Company of any future dividends and the amount
thereof will depend upon the Company's results of operations, financial
condition, cash requirements, future prospects, limitations imposed by credit
agreements or senior securities and other factors deemed relevant by the Board
of Directors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources," which is
incorporated by reference from the Company's 1998 Annual Report.
 
PRIVATELY PLACED SECURITIES
 
     On April 24, 1998, the Company issued warrants to Hakman & Co. to purchase
40,250 shares of Common Stock at an exercise price of $8.88 per share in a
transaction intended to be exempt from the registration requirements of the
Securities Act of 1993, as amended (the "Securities Act") , by virtue of Section
4(2) thereof. The warrants are exercisable one year from the date of grant and
have a term of three years.
 
     On February 24, 1998, the Company issued warrants to Susan McBroom to
purchase 7,500 shares of Common Stock at an exercise price of $6.94 per share in
a transaction intended to be exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof. The warrants are exercisable
in increments of 25% per year from the date of grant and have a term of five
years.
 
ITEM 6--SELECTED FINANCIAL DATA
 
     The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the caption "Corporate Profile" and is
incorporated herein by reference.
 
ITEM 7-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and is incorporated
herein by reference.
 
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company did not have any investment securities subject to market risk
at June 30, 1998.
 
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the captions "Independent Auditors' Report,"
"Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Stockholders' Equity," "Consolidated Statements of
Cash Flows" and "Notes to Consolidated Financial Statements" and is incorporated
herein by reference.
 
ITEM 9-- CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
     The information required by this Item (other than the information regarding
executive officers set forth at the end of Item 1 of Part I of this Form 10-K)
will be contained in the Company's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders under the captions "Board of Directors and
Election of Directors" and
 
                                       32
<PAGE>   33
 
"Security Ownership -- Section 16(a) Beneficial Ownership Reporting Compliance,"
and is incorporated herein by reference.
 
ITEM 11--EXECUTIVE COMPENSATION
 
     The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the
captions "Board of Directors and Election of Directors" and "Executive
Compensation," and is incorporated herein by reference.
 
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the
caption "Security Ownership," and is incorporated herein by reference.
 
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the
caption "Certain Transactions and Relationships with the Company; Legal
Proceedings," and is incorporated herein by reference.
 
                                    PART IV
 
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
 
(A)(1) FINANCIAL STATEMENTS:
 
     The information required by this Item is contained in the Company's 1998
Annual Report to Stockholders under the captions "Independent Auditors' Report,"
"Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Stockholders' Equity," "Consolidated Statements of
Cash Flows" and "Notes to Consolidated Financial Statements" and is incorporated
herein by reference.
 
(A)(2) FINANCIAL STATEMENT SCHEDULE:
 
     See (d) below.
 
(A)(3) EXHIBITS:
 
     The following exhibits are filed herewith or incorporated by reference
herein:
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<C>        <S>
  1.1      Underwriting Agreement dated as of February 11, 1998, among
           Balanced Care Corporation, BancAmerica Robertson Stephens,
           Smith Barney, Inc. and BT Alex. Brown Incorporated
           (incorporated by reference to Exhibit 1.1 to the Current
           Report on Form 8-K dated February 18, 1998 (File No.
           1-13845))
  2.1      Asset Purchase Agreement, dated as of September 18, 1997, by
           and between Balanced Care Corporation and Butler Senior
           Care, Inc. (incorporated by reference to Exhibit 2.17 to the
           Registration Statement on Form S-1 (No. 333-37833))
  2.2      Asset Purchase Agreement, dated as of September 3, 1997, by
           and among Balanced Care Corporation, Delores Feltrop Nahar,
           with the joinder of Albert L. Nahar and Kenneth A. Feltrop,
           with the joinder of Lori L. Feltrop, individually and d/b/a
           Feltrop Personal Care Home (incorporated by reference to
           Exhibit 2.18 to the Registration Statement on Form S-1 (No.
           333-37833))
</TABLE>
 
                                       33
<PAGE>   34
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<C>        <S>
  2.3      Asset Purchase Agreement, dated as of October 16, 1997, by
           and among Managed Healthcare, Inc., Long Term Pharmaceutical
           Care, Inc., Balanced Care Corporation and Omnicare, Inc.
           (incorporated by reference to Exhibit 2.19 to the
           Registration Statement on Form S-1 (No. 333-37833))
  2.4      Asset Purchase Agreement, dated as of October 24, 1997, by
           and between Balanced Care Corporation and Triangle
           Retirement Services, Inc. (incorporated by reference to
           Exhibit 2.20 to the Registration Statement on Form S-1 (No.
           333-37833))
  2.5      Asset Purchase Agreement, dated as of November 26, 1997, by
           and between Balanced Care Corporation and Gethsemane
           Retirement Community and Rehabilitation Center, Inc.
           (incorporated by reference to Exhibit 2.21 to the
           Registration Statement on Form S-1 (No. 333-37833))
  2.6      Asset Purchase Agreement, dated as of November 26, 1997, by
           and between Balanced Care Corporation and Gethsemane
           Assisted Living, Inc. (incorporated by reference to Exhibit
           2.22 to the Registration Statement on Form S-1 (No.
           333-37833))
  3.1      Amended and Restated Certificate of Incorporation of
           Balanced Care Corporation (incorporated by reference to
           Exhibit 3.1 to the Registration Statement on Form S-1 (No.
           333-37833))
  3.2      Bylaws of Balanced Care Corporation, as amended
           (incorporated by reference to Exhibit 3.2 to the
           Registration Statement on Form S-1 (No. 333-37833))
  4.1      Form of Capital Stock Purchase Warrant, together with
           schedule (incorporated by reference to Exhibit 4.9 to the
           Registration Statement on Form S-1 (No. 333-37833))
  4.2      Form of Capital Stock Purchase Warrant, together with
           schedule (incorporated by reference to Exhibit 4.10 to the
           Registration Statement on Form S-1 (No. 333-37833))
  4.3      Form of Capital Stock Purchase Warrant, together with
           schedule (incorporated by reference to Exhibit 4.11 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.1      Form of Meditrust Facility Lease Agreement, together with
           schedule (incorporated by reference to Exhibit 10.46 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.2      Form of Meditrust Facility Lease Agreement (filed herewith)
 10.3      Schedule to Form of Meditrust Facility Lease Agreement
           (filed herewith)
 10.4      Form of Meditrust Leasehold Improvement Agreement (filed
           herewith)
 10.5      Schedule to Form of Meditrust Leasehold Improvement
           Agreement (filed herewith)
 10.6      Form of Meditrust Option Agreement (filed herewith)
 10.7      Schedule to Form of Meditrust Option Agreement (filed
           herewith)
 10.8      Form of Meditrust Shortfall Funding Agreement (filed
           herewith)
 10.9      Schedule to Form of Meditrust Shortfall Funding Agreement
           (filed herewith)
 10.10     Form of Meditrust Working Capital Assurance Agreement (filed
           herewith)
 10.11     Schedule to Form of Meditrust Working Capital Assurance
           Agreement (filed herewith)
 10.12     Form of Nationwide Health Properties, Inc. ("NHP") First
           Series Lease and Security Agreement (filed herewith)
 10.13     Schedule to Form of NHP First Series Lease and Security
           Agreement (filed herewith)
 10.14     Form of NHP Second Series Lease and Security Agreement
           (filed herewith)
 10.15     Schedule to Form of NHP Second Series Lease and Security
           Agreement (filed herewith)
 10.16     Form of NHP Development Agreement (filed herewith)
 10.17     Schedule to Form of NHP Development Agreement (filed
           herewith)
 10.18     NHP First Series Master Investment Agreement (filed
           herewith)
 10.19     NHP Second Series Master Investment Agreement (filed
           herewith)
</TABLE>
 
                                       34
<PAGE>   35
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<C>        <S>
 10.20     Form of NHP First Series Option Agreement (filed herewith)
 10.21     Schedule to Form of NHP First Series Option Agreement (filed
           herewith)
 10.22     Form of NHP Second Series Option Agreement (filed herewith)
 10.23     Schedule to Form of NHP Second Series Option Agreement
           (filed herewith)
 10.24     Form of NHP First Series Shortfall Funding Agreement (filed
           herewith)
 10.25     Schedule to Form of NHP First Series Shortfall Funding
           Agreement (filed herewith)
 10.26     Form of NHP Second Series Shortfall Funding Agreement (filed
           herewith)
 10.27     Schedule to Form of NHP Second Series Shortfall Funding
           Agreement (filed herewith)
 10.28     Form of NHP First Series Working Capital Assurance Agreement
           (filed herewith)
 10.29     Schedule to Form of NHP First Series Working Capital
           Assurance Agreement (filed herewith)
 10.30     Form of NHP Second Series Working Capital Assurance
           Agreement (filed herewith)
 10.31     Schedule to Form of NHP Second Series Working Capital
           Assurance Agreement (filed herewith)
 10.32     Form of American Health Properties, Inc. ("AHP") Lease and
           Security Agreement (filed herewith)
 10.33     Schedule to Form of AHP Lease and Security Agreement (filed
           herewith)
 10.34     Form of AHP Development Agreement, together with schedule
           (incorporated by reference to Exhibit 10.74 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.35     Schedule to Form of AHP Development Agreement (filed
           herewith)
 10.36     Form of AHP Option Agreement (filed herewith)
 10.37     Schedule to Form of AHP Option Agreement (filed herewith)
 10.38     AHP Option Agreement II (filed herewith)
 10.39     Form of AHP Shortfall Funding Agreement, together with
           schedule (incorporated by reference to Exhibit 10.75 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.40     Schedule to Form of AHP Shortfall Funding Agreement (filed
           herewith)
 10.41     Form of AHP Working Capital Assurance Agreement, together
           with schedule (incorporated by reference to Exhibit 10.80 to
           the Registration Statement on Form S-1 (No. 333-37833))
 10.42     Schedule to Form of AHP Working Capital Assurance Agreement
           (filed herewith)
 10.43     Form of Ocwen Financial Corporation ("Ocwen") Lease
           Agreement (filed herewith)
 10.44     Schedule to Form of Ocwen Lease Agreement (filed herewith)
 10.45     Form of Ocwen Development Agreement (filed herewith)
 10.46     Schedule to Form of Ocwen Development Agreement (filed
           herewith)
 10.47     Form of Ocwen Option Agreement (filed herewith)
 10.48     Schedule to Form of Ocwen Option Agreement (filed herewith)
 10.49     Form of Ocwen Shortfall Funding Agreement (filed herewith)
 10.50     Schedule to Form of Ocwen Shortfall Funding Agreement (filed
           herewith)
 10.51     Ocwen Shortfall Funding Agreement II (filed herewith)
 10.52     Form of Ocwen Working Capital Assurance Agreement (filed
           herewith)
 10.53     Schedule to Form of Ocwen Working Capital Assurance
           Agreement (filed herewith)
 10.54     Ocwen Working Capital Assurance Agreement II (filed
           herewith)
 10.55     First Amendment to Option Agreements, Shortfall Funding
           Agreements and Stock Pledge Agreements (filed herewith)
</TABLE>
 
                                       35
<PAGE>   36
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<C>        <S>
 10.56     Form of Capstone Lease, together with schedule (incorporated
           by reference to Exhibit 10.22 to the Registration Statement
           on Form S-1 (No. 333-37833))
 10.57     Form of Capstone Lease (filed herewith)
 10.58     Schedule to Form of Capstone Lease (filed herewith)
 10.59     Capstone Development Agreement (filed herewith)
 10.60     Form of Capstone Option Agreement (filed herewith)
 10.61     Schedule to Form of Capstone Option Agreement (filed
           herewith)
 10.62     Form of Capstone Shortfall Funding Agreement (filed
           herewith)
 10.63     Schedule to Form of Capstone Shortfall Funding Agreement
           (filed herewith)
 10.64     Form of Capstone Working Capital Assurance Agreement (filed
           herewith)
 10.65     Schedule to Form of Capstone Working Capital Assurance
           Agreement (filed herewith)
 10.66     Form of Capstone Assignment, Assumption and Amendment
           Agreement (filed herewith)
 10.67     Schedule to Form of Capstone Assignment, Assumption and
           Amendment Agreement (filed herewith)
 10.68     Lease, dated as of March 21, 1996, by and between HCPI Trust
           and BCC at Mt. Royal Pines, Inc. (incorporated by reference
           to Exhibit 10.34 to the Registration Statement on Form S-1
           (No. 333-37833))
 10.69     First Amendment, dated as of March 31, 1997, to Lease dated
           as of March 21, 1996 by and between HCPI Trust and BCC at
           Mt. Royal Pines, Inc. (incorporated by reference to Exhibit
           10.35 to the Registration Statement on Form S-1 (No.
           333-37833))
 10.70     Balanced Care Corporation 1996 Stock Incentive Plan as
           Amended and Restated, effective July 25, 1997 (incorporated
           by reference to Exhibit 10.1 to the Registration Statement
           on Form S-1 (No. 333-37833))
 10.71     Master Distribution Agreement, dated as of March 3, 1997,
           between Sysco Corporation and Balanced Care Corporation
           (incorporated by reference to Exhibit 10.2 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.72     Sublease, dated as of January 16, 1997, by and between Ryder
           Truck Rental, Inc. and Balanced Care Corporation
           (incorporated by reference to Exhibit 10.3 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.73     Sublease, dated as of June 26, 1996, by and between Liberty
           Mutual Insurance Company and Balanced Care Corporation
           (incorporated by reference to Exhibit 10.4 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.74     Second Lease Amendment, dated as of July 1, 1997, by and
           between Noble House of Dixon, Inc. And Dixon Management,
           Inc. (incorporated by reference to Exhibit 10.8 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.75     Employment Agreement, dated as of August 1, 1996, by and
           between Balanced Care Corporation and Brad E. Hollinger
           (incorporated by reference to Exhibit 10.37 to the
           Registration Statement on Form S-1 (No. 333-37833))**
 10.76     Employment Agreement, dated as of May 1, 1996, by and
           between Balanced Care Corporation and William T. McCarthy
           (incorporated by reference to Exhibit 10.38 to the
           Registration Statement on Form S-1 (No. 333-37833))**
 10.77     Employment Agreement, dated as of September 20, 1995, by and
           between Balanced Care Corporation and Robert J. Sutton
           (incorporated by reference to Exhibit 10.39 to the
           Registration Statement on Form S-1 (No. 333-37833))**
</TABLE>
 
                                       36
<PAGE>   37
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<C>        <S>
 10.78     Employment Agreement, dated as of September 20, 1995, by and
           between Balanced Care Corporation and Brian L. Barth
           (incorporated by reference to Exhibit 10.40 to the
           Registration Statement on Form S-1 (No. 333-37833))**
 10.79     Amendment to Employment Agreement, dated as of July 1, 1998,
           by and between Balanced Care Corporation and Brian L. Barth
           (filed herewith)**
 10.80     Employment Agreement, dated as of September 1, 1996, by and
           among Foster Health Care Group, Inc., John D. Foster and
           Balanced Care Corporation (incorporated by reference to
           Exhibit 10.41 to the Registration Statement on Form S-1 (No.
           333-37833))**
 10.81     Assignment, Assumption and Consent Agreement, dated as of
           June 30, 1997, by and among Foster Health Care Group, Inc.,
           BCC Management Company at Missouri, Inc. And John Foster
           (incorporated by reference to Exhibit 10.42 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.82     Employment Agreement, dated as of November 24, 1997, by and
           between Balanced Care Corporation and Stephen G. Marcus
           (incorporated by reference to Exhibit 10.43 to the
           Registration Statement on Form S-1 (No. 333-37833))**
 10.83     Consulting Agreement, dated as of October 3, 1996, by and
           between Balanced Care Corporation and Kenneth F. Barber
           (incorporated by reference to Exhibit 10.44 to the
           Registration Statement on Form S-1 (No. 333-37833))
 10.84     First Amendment, dated as of March 13, 1997, to the
           Consulting Agreement dated as of October 3, 1996 by and
           between Balanced Care Corporation and Kenneth F. Barber
           (incorporated by reference to Exhibit 10.45 to the
           Registration Statement on Form S-1 (No. 333-37833))
 13.1      Portions of the Annual Report to Stockholders for the Year
           Ended June 30, 1998 (filed herewith)
 21.1      Schedule of Subsidiaries of Balanced Care Corporation (filed
           herewith)
 23.1      Independent Auditors' Consent -- KPMG Peat Marwick LLP
           (filed herewith)
 27.1      Financial Data Schedule (filed herewith)
</TABLE>
 
---------------
 
 * Certain exhibits and schedules to the Exhibits attached hereto have been
   omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any
   omitted exhibit or schedule will be furnished to the Commission upon request.
 
** Management contract or compensatory plan or arrangement required to be filed
   as an exhibit to this Annual Report on Form 10-K.
 
(B) REPORTS ON FORM 8-K:
 
     No Current Reports on Form 8-K were filed for the quarter ended June 30,
1998.
 
(C) EXHIBITS:
 
     See (a) (3) above.
 
(D) FINANCIAL STATEMENT SCHEDULE:
 
     Schedule II--Valuation and Qualifying Accounts.
 
     All other schedules for which provision is made in the applicable
accounting regulations of the United States Securities and Exchange Commission
have been omitted because such schedules are not required under the related
instructions or are inapplicable or because the information required is included
in the consolidated financial statements or notes thereto.
 
                                       37
<PAGE>   38
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the United States
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
                                            BALANCED CARE CORPORATION
 
                                            By:     /s/ BRAD E. HOLLINGER
                                              ----------------------------------
                                              Brad E. Hollinger
                                              Chairman of the Board, President
                                                and Chief Executive Officer
 
Date: September 28, 1998
 
     Pursuant to the requirements of the United States 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.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                     DATE
                      ---------                                   -----                     ----
<C>                                                    <S>                           <C>
 
                /s/ BRAD E. HOLLINGER                  Chairman of the Board,        September 28, 1998
-----------------------------------------------------    President and Chief
                  Brad E. Hollinger                      Executive Officer and a
                                                         Director (Principal
                                                         Executive Officer)
 
                  /s/ PAUL A. KRUIS                    Chief Financial Officer       September 28, 1998
-----------------------------------------------------    (Principal Financial
                    Paul A. Kruis                        Officer and Principal
                                                         Accounting Officer)
 
                 /s/ JOHN M. BRENNAN                   Director                      September 28, 1998
-----------------------------------------------------
                   John M. Brennan
 
                 /s/ BILL R. FOSTER                    Director                      September 22, 1998
-----------------------------------------------------
                   Bill R. Foster
 
               /s/ DAVID L. GOLDSMITH                  Director                      September 28, 1998
-----------------------------------------------------
                 David L. Goldsmith
 
                /s/ EDWARD R. STOLMAN                  Director                      September 22, 1998
-----------------------------------------------------
                  Edward R. Stolman
 
                                                       Director
-----------------------------------------------------
                  George H. Strong
 
               /s/ RAYMOND E. SCHULTZ                  Director                      September 23, 1998
-----------------------------------------------------
                 Raymond E. Schultz
</TABLE>
 
                                       38
<PAGE>   39
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<C>      <S>
  10.2   Form of Meditrust Facility Lease Agreement
  10.3   Schedule to Form of Meditrust Facility Lease Agreement
  10.4   Form of Meditrust Leasehold Improvement Agreement
  10.5   Schedule to Form of Meditrust Leasehold Improvement
         Agreement
  10.6   Form of Meditrust Option Agreement
  10.7   Schedule to Form of Meditrust Option Agreement
  10.8   Form of Meditrust Shortfall Funding Agreement
  10.9   Schedule to Form of Meditrust Shortfall Funding Agreement
 10.10   Form of Meditrust Working Capital Assurance Agreement
 10.11   Schedule to Form of Meditrust Working Capital Assurance
         Agreement
 10.12   Form of Nationwide Health Properties, Inc. ("NHP") First
         Series Lease and Security Agreement
 10.13   Schedule to Form of NHP First Series Lease and Security
         Agreement
 10.14   Form of NHP Second Series Lease and Security Agreement
 10.15   Schedule to Form of NHP Second Series Lease and Security
         Agreement
 10.16   Form of NHP Development Agreement
 10.17   Schedule to Form of NHP Development Agreement
 10.18   NHP First Series Master Investment Agreement
 10.19   NHP Second Series Master Investment Agreement
 10.20   Form of NHP First Series Option Agreement
 10.21   Schedule to Form of NHP First Series Option Agreement
 10.22   Form of NHP Second Series Option Agreement
 10.23   Schedule to Form of NHP Second Series Option Agreement
 10.24   Form of NHP First Series Shortfall Funding Agreement
 10.25   Schedule to Form of NHP First Series Shortfall Funding
         Agreement
 10.26   Form of NHP Second Series Shortfall Funding Agreement
 10.27   Schedule to Form of NHP Second Series Shortfall Funding
         Agreement
 10.28   Form of NHP First Series Working Capital Assurance Agreement
 10.29   Schedule to Form of NHP First Series Working Capital
         Assurance Agreement
 10.30   Form of NHP Second Series Working Capital Assurance
         Agreement
 10.31   Schedule to Form of NHP Second Series Working Capital
         Assurance Agreement
 10.32   Form of American Health Properties, Inc. ("AHP") Lease and
         Security Agreement
 10.33   Schedule to Form of AHP Lease and Security Agreement
 10.35   Schedule to Form of AHP Development Agreement
 10.36   Form of AHP Option Agreement
 10.37   Schedule to Form of AHP Option Agreement
 10.38   AHP Option Agreement II
 10.40   Schedule to Form of AHP Shortfall Funding Agreement
 10.42   Schedule to Form of AHP Working Capital Assurance Agreement
 10.43   Form of Ocwen Financial Corporation ("Ocwen") Lease
         Agreement
</TABLE>
 
                                       39
<PAGE>   40
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
<C>      <S>
 10.44   Schedule to Form of Ocwen Lease Agreement
 10.45   Form of Ocwen Development Agreement
 10.46   Schedule to Form of Ocwen Development Agreement
 10.47   Form of Ocwen Option Agreement
 10.48   Schedule to Form of Ocwen Option Agreement
 10.49   Form of Ocwen Shortfall Funding Agreement
 10.50   Schedule to Form of Ocwen Shortfall Funding Agreement
 10.51   Ocwen Shortfall Funding Agreement II
 10.52   Form of Ocwen Working Capital Assurance Agreement
 10.53   Schedule to Form of Ocwen Working Capital Assurance
         Agreement
 10.54   Ocwen Working Capital Assurance Agreement II
 10.55   First Amendment to Option Agreements, Shortfall Funding
         Agreements and Stock Pledge Agreements
 10.57   Form of Capstone Lease
 10.58   Schedule to Form of Capstone Lease
 10.59   Capstone Development Agreement
 10.60   Form of Capstone Option Agreement
 10.61   Schedule to Form of Capstone Option Agreement
 10.62   Form of Capstone Shortfall Funding Agreement
 10.63   Schedule to Form of Capstone Shortfall Funding Agreement
 10.64   Form of Capstone Working Capital Assurance Agreement
 10.65   Schedule to Form of Capstone Working Capital Assurance
         Agreement
 10.66   Form of Capstone Assignment, Assumption and Amendment
         Agreement
 10.67   Schedule to Form of Capstone Assignment, Assumption and
         Amendment Agreement
 10.79   Amendment to Employment Agreement, dated as of July 1, 1998,
         by and between Balanced Care Corporation and Brian L.
         Barth**
  13.1   Portions of the Annual Report to Stockholders for the Year
         Ended June 30, 1998
  21.1   Schedule of Subsidiaries of Balanced Care Corporation
  23.1   Independent Auditors' Consent -- KPMG Peat Marwick LLP
  27.1   Financial Data Schedule
</TABLE>
 
---------------
 
 * Certain exhibits and schedules to the Exhibits attached hereto have been
   omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any
   omitted exhibit or schedule will be furnished to the Commission upon request.
 
** Management contract or compensatory plan or arrangement required to be filed
   as an exhibit to this Annual Report on Form 10-K.
 
                                       40
<PAGE>   41
 
                  BALANCED CARE CORPORATIONS AND SUBSIDIARIES
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
 
                FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
            COLUMN A                COLUMN B             COLUMN C             COLUMN D       COLUMN E
            --------                --------     ------------------------    ----------    -------------
                                                        ADDITIONS
                                                 ------------------------
                                   BALANCE AT    CHARGED TO    CHARGED TO
                                   BEGINNING     OPERATING       OTHER                      BALANCE AT
           DESCRIPTION             OF PERIOD      ACCOUNTS      ACCOUNTS     DEDUCTIONS    END OF PERIOD
           -----------             ----------    ----------    ----------    ----------    -------------
<S>                                <C>           <C>           <C>           <C>           <C>
Year ended June 30, 1998:
  Allowance for doubtful
     accounts....................     $330          $722          $ --         $(136)(2)       $916
                                      ====          ====          ====         =====           ====
Year ended June 30, 1997:
  Allowance for doubtful
     accounts....................     $ --          $ 40          $326(1)      $ (36)(2)       $330
                                      ====          ====          ====         =====           ====
Year ended June 30, 1996:
  Allowance for doubtful
     accounts....................     $ --          $ --          $ --         $  --           $ --
                                      ====          ====          ====         =====           ====
</TABLE>
 
---------------
 
(1) Net additions as a result of acquisitions
 
(2) Amount represents bad debt write-offs
 
                                       41