<PAGE>   1
Exhibit 10.138

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT"). THE
HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF BALANCED
CARE CORPORATION (THE "CORPORATION") THAT SUCH SECURITIES MAY BE OFFERED, SOLD
OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT PROVIDED BY RULE 144
OR RULE 144A, IF APPLICABLE, SUBJECT TO COMPLIANCE WITH ANY STATE SECURITIES
LAWS, (C) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S
UNDER THE U.S. SECURITIES ACT, OR (D) IN A TRANSACTION THAT DOES NOT OTHERWISE
REQUIRE REGISTRATION UNDER THE U.S. SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAWS, PROVIDED AN OPINION OF COUNSEL OF RECOGNIZED STANDING
REASONABLY SATISFACTORY TO THE CORPORATION HAS BEEN PROVIDED TO THAT EFFECT. A
NEW CERTIFICATE BEARING NO LEGEND MAY BE OBTAINED FROM THE REGISTRAR AND
TRANSFER AGENT FOR THESE SECURITIES UPON DELIVERY OF THIS CERTIFICATE AND A DULY
EXECUTED DECLARATION, IN A FORM REASONABLY SATISFACTORY TO THE CORPORATION TO
THE EFFECT THAT SUCH SALE IS BEING MADE IN ACCORDANCE WITH RULE 144 OR 144A
UNDER THE U.S. SECURITIES ACT OR RULE 904 OF REGULATION S UNDER THE U.S.
SECURITIES ACT OR IN A TRANSACTION THAT DOES NOT OTHERWISE REQUIRE REGISTRATION
UNDER THE U.S. SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS.



                            BALANCED CARE CORPORATION
                    9.5% Unsecured Convertible Grid Debenture



Issued to:        VXM INVESTMENTS LIMITED

Issued by:        BALANCED CARE CORPORATION
                  1215 Manor Drive Mechanicsburg, PA 17055 U.S.A.



$4,666,667                                          Maturity Date:  July 1, 2005
(Initial Principal Amount)
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                                     - 2 -

                                   ARTICLE I
                                 PROMISE TO PAY

1.1      Promise to Pay

         BALANCED CARE CORPORATION (the "Corporation"), a corporation
incorporated under the Laws of the State of Delaware and having its chief
executive office at 1215 Manor Drive, Mechanicsburg, PA 17055, U.S.A., for value
received, hereby promises to pay to or to the order of VXM Investments Limited,
a Cayman Island corporation, its successors and assigns (the "Holder"), at
Unsworth & Associates, Herengracht 483, 1017 BT, Amsterdam, Netherlands,
Attention: J. B. Unsworth, or at such other place as the Holder may direct at
any time and from time to time, the initial principal amount of $4,666,667
together with interest, accrued and payable quarterly in accordance with Section
3.1 hereof, on each Interest Payment Date, on the principal amount outstanding
from time to time and on all other amounts now or hereafter payable hereunder
(including accrued and unpaid interest), in the case of principal, from the date
hereof, and in the case of costs, charges and expenses, from the date on which
they were incurred, and in the case of all other amounts, from the date on which
such other amounts are payable, in each case until July 1, 2005, calculated
quarterly on each Interest Payment Date until all Obligations hereunder have
been paid and satisfied in full and thereafter, calculated monthly on the last
day of each and every month, in all cases at the rate of 9.5% per annum, as well
after as before demand, default and judgment, together with interest on overdue
interest at the same rate. Provided that the Corporation has not advised the
Holder that it wishes to pay interest in cash as specified in Section 3.1(b), on
each Interest Payment Date (as hereinafter defined) the amount of interest
payable shall be added to and form part of the principal amount outstanding
hereunder, all as recorded on the grid attached as Schedule "A" hereto (the
principal amount owing from time to time, any interest payable thereon and all
other amounts now or hereafter payable hereunder, and at any time outstanding
hereunder, shall be referred to herein as the "Obligations"). Unless the
Debenture is earlier converted in its entirety in accordance with the terms
hereof, the Obligations shall be due and payable on July 1, 2005 (the "Maturity
Date") or such earlier date as the Obligations may become due and payable in
accordance with the terms and provisions hereof. This Debenture shall rank pari
passu with another convertible debenture to be issued by the Corporation on or
about July 31, 2000 in the same principal amount and substantially the same form
as this Debenture.
<PAGE>   3
                                     - 3 -


1.2      Transferability

         This Debenture and all obligations associated herewith shall not be
transferable by the Corporation without the express written consent of the
Holder, such consent not to be unreasonably withheld. Unless prohibited by
applicable securities Laws, the Holder may, without the consent of the
Corporation, grant participations in all or any part of this Debenture to one or
more Persons (each a "Participant") or, subject to the immediately following
sentence, assign all or any part of its interest in this Debenture to one or
more Persons (each an "Assignee"). The Holder may deliver to any prospective
Participant or Assignee a copy of any material in its possession relating to the
Corporation, in order to permit such prospective Participant or Assignee to
assess its investment; provided that each such delivery is made on the
understanding that the information contained therein is confidential in nature.
The Holder shall act on behalf of all its Participants in all dealings with the
Corporation in respect of this Debenture and the Corporation may rely on its
dealings with the Holder in this regard. This Debenture, and the rights
associated herewith, may be freely transferred by the Holder only upon surrender
of the Debenture to the Maker for reissuance along with appropriate transfer
instructions. The Maker shall not be required to recognize a new holder of this
Debenture as the new registered holder of this Debenture nor to make any payment
of principal or interest to such a new holder except upon receipt of the
Debenture together with such transfer instructions. Any new holder of this
Debenture shall receive a new debenture issued in replacement of this Debenture
registered to and in the name of the new holder, and otherwise containing
identical terms and conditions to those of this Debenture.

                                   ARTICLE II
                                 INTERPRETATION

2.1      Definitions

         In this Debenture:

    (a)  "Amended Registration Rights Agreement" has the meaning attributed to
         such term in Section 7.6;

    (b)  "Arm's Length" means the disinterested state existing between two or
         more unrelated parties, each acting in good faith in his or her own
         self-interest;
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                                     - 4 -


    (c)  "Assignee" has the meaning attributed to such term in Section 1.2;

    (d)  "Audited Financial Statements" means the audited financial statements
         of the Corporation as at and for the fiscal year ended June 30, 1999
         and the report of the auditors of the Corporation thereon filed with
         the Securities and Exchange Commission on the Form 10-K/A (Amendment
         No. 1) of the Corporation dated September 28, 1999, together with all
         Exhibits thereto;

    (e)  "Board of Directors" means the Corporation's board of directors;

    (f)  "Business Day" means any day, other than (i) a Saturday, Sunday or
         statutory holiday in the State of New York or (ii) any of the first,
         second, seventh or eighth day of Passover, the first or second day of
         Shavuoth, the first or second day of Rosh Hashanah, Yom Kippur, the
         first or second day of Sukkoth, Shemini Azereth or Simchas Torah, and
         the day prior to any of the foregoing days;

    (g)  "Closing Date" means July 31, 2000;

    (h)  "Common Shares" means common shares of the Corporation from time to
         time authorized, issued and outstanding, and includes any securities of
         the Corporation issued on a merger, amalgamation or other
         reorganization of or including the Corporation which are issued in
         exchange for or in replacement of the common shares of the Corporation;

    (i)  "Conversion Notice" has the meaning attributed to such term in Section
         4.2;

    (j)  "Conversion Rate" means the dollar amount for which each Common Share
         may be issued upon the exercise of the Conversion Right in accordance
         with the provisions of Article IV;

    (k)  "Conversion Right" means the right attached to this Debenture which
         permits the Holder to convert this Debenture into Common Shares in
         accordance with the provisions of Article IV;

    (l)  "Corporation" means Balanced Care Corporation and its successors;
<PAGE>   5
                                     - 5 -


    (m)  "Current Market Price Per Share" means the price per Common Share at
         any date which shall be the average closing price per share at which
         the Common Shares are traded for 20 consecutive trading days ending 5
         trading days preceding such date on the American Stock Exchange or, if
         the Common Shares are not listed on such exchange, on such stock
         exchange on which the Common Shares are listed as may be selected for
         such purpose by the Board of Directors or, if the Common Shares are not
         listed on any stock exchange, then on the over-the-counter market. The
         average closing price per share shall be determined by dividing the sum
         of the daily closing prices of the Common Shares sold on the said
         exchange or market, as the case may be, during the said 20 consecutive
         trading days by 20. If the Common Shares are not being traded on an
         exchange or market at the time of such calculation, then the Current
         Market Price Per Share shall be a price determined in good faith by the
         Board of Directors based on the written advice of an investment banking
         firm selected by the Corporation and acceptable to the Holder acting
         reasonably;

    (n)  "Debenture", "Debentures", "hereto", "herein", "hereof", "hereby",
         "hereunder", and any similar expressions refer to this debenture and
         the schedules attached hereto and not to any particular article,
         Section or other portion hereof, and include any and every instrument
         supplemental hereto or amending any part hereof;

    (o)  "Early Termination Date" the meaning attributed to such term in Section
         5.1;

    (p)  "Event of Default" has the meaning attributed to such term in Section
         9.1;

    (q)  "Grid Schedule" means the grid schedule annexed hereto as Schedule "A";

    (r)  "HSR Act" means the Hart-Scott-Rodino Antitrust Improvement Act of
         1976, as amended, and the rules and regulations thereunder;

    (s)  "Holder" has the meaning attributed to such term in Section 1.1;

    (t)  "IPC" means IPC Advisors S.a.r.l;
<PAGE>   6
                                     - 6 -


    (u)  "Interest Payment Date" means September 30, December 31, March 31 and
         June 30 each year until this Debenture is converted or the Maturity
         Date, provided that if any Interest Payment Date does not fall on a
         Business Day, then such Interest Payment Date shall be the next
         Business Day following such date, the first Interest Payment Date being
         October 2, 2000;

    (v)  "Issue Date" has the meaning attributed to such term in Section 4.2;

    (w)  "Laws" means all legally binding federal, provincial, state, municipal
         and local constitutions, treaties, laws, statutes, codes, ordinances,
         decrees, rules, regulations, by-laws, judicial or administrative
         judgments, orders, decisions, rulings or awards, policies, guidelines,
         including general principles of civil and common law;

    (x)  "Material Adverse Effect" means any change or effect out of the
         ordinary course of business, operations or results of the Corporation
         that, individually or when taken together with all similar or related
         changes or effects is or could reasonably be expected to be materially
         adverse to the Corporation, its business, operations, properties or
         condition or its Subsidiaries, taken as a whole, or the Corporation's
         ability to perform its obligations hereunder, provided that, for
         purposes of this definition, a change or effect out of the ordinary
         course of business, operations or results of the Corporation that
         individually or when taken together with all similar or related changes
         or effects, results or could reasonably be expected to result in a loss
         of assets, increase in liabilities or decrease in cash flow (or any
         combination of the foregoing) of any of the Corporation and its
         Subsidiaries exceeding $750,000, in the aggregate, shall be deemed to
         be materially adverse to the Corporation;

    (y)  "Maturity Date" means July 1, 2005;

    (z)  "NHP" means Nationwide Health Properties Inc, a Maryland corporation,
         together with its affiliates;

    (aa) "NHP Leases" means the master leases each dated among, inter alia, the
         Corporation and NHP;
<PAGE>   7
                                     - 7 -


    (bb) "Obligations" has the meaning ascribed thereto in Section 1.1;

    (cc) "Officers' Certificate" means a certificate signed by the President or
         the Chief Financial Officer of the Corporation;

    (dd) "Participant" has the meaning attributed to such term in Section 1.2;

    (ee) "Person" means any individual, partnership, limited partnership, joint
         venture, syndicate, sole proprietorship, company or corporation with or
         without share capital, unincorporated association, trust, trustee,
         executor, administrator or other legal personal representative,
         regulatory body or agency, government or governmental agency, authority
         or entity however designated or constituted;

    (ff) "Registration Rights Agreement" has the meaning attributed to such term
         in Section 7.6;

    (gg) "Subscription Agreement" has the meaning attributed to such term in
         Section 6.1; and

    (hh) "Subsidiaries" means the subsidiaries of the Corporation on the date
         hereof or that may be acquired by or organized by the Corporation after
         the date hereof and "Subsidiary" means any one of them.

2.2      Headings

         The inclusion of headings in this Debenture is for convenience of
reference only and shall not affect the construction or interpretation hereof.

2.3      References to Sections

         Whenever in this Debenture a particular article, section or other
portion thereof is referred to, such reference pertains to the particular
article, section or portion thereof contained herein, unless otherwise
indicated.

2.4      Currency

         Except where otherwise expressly provided, all amounts in this
Debenture are stated and shall be paid in U.S. currency.
<PAGE>   8
                                     - 8 -


2.5      Gender and Number

         In this Debenture, unless the context otherwise requires, words
importing the singular include the plural and vice versa and words importing
gender include all genders.

2.6      Invalidity of Provisions

         Each of the provisions contained in this Debenture is distinct and
severable and a declaration of invalidity or unenforceability of any such
provision or part thereof by a court of competent jurisdiction shall not affect
the validity or enforceability of any other provision hereof.

2.7      Amendment or Waiver

         No amendment or waiver of this Debenture shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any provision
of this Debenture shall constitute a waiver of any other provision nor shall any
waiver of any provision of this Debenture constitute a continuing waiver unless
otherwise expressly provided.

2.8      Governing Law

         This Debenture shall be governed by and construed in accordance with
the Laws of the Commonwealth of Pennsylvania, excluding its conflicts of law
principles.

                                  ARTICLE III
                                    INTEREST

3.1      Payment of Interest

    (a)  Payment in Kind: Provided that the Corporation has not advised the
         Holder in writing that it wishes to pay interest in cash on any
         Interest Payment Date, at least 10 Business Days prior to such Interest
         Payment Date, the Corporation shall forward to the Holder a copy of the
         Grid Schedule updated to reflect the interest payment due on such date
         and the increased "Outstanding Principal Amount" under this Debenture,
         as increased by the amount of such interest payment that will not be
         paid in cash by the Corporation on such Interest Payment Date.

    (b)  Cash Payment: In the event that the Corporation has advised the Holder
         in writing that it wishes to pay interest in cash on any Interest
         Payment Date, at
<PAGE>   9
                                     - 9 -


         least 10 Business Days prior to such Interest Payment Date, the
         Corporation shall forward to the Holder a copy of the Grid Schedule
         updated to reflect the interest payment due on such date. On such
         Interest Payment Date, the Corporation shall deliver to the Holder an
         amount in cash by wire transfer of immediately available funds equal to
         the interest payment due on such date.

                                   ARTICLE IV
                                   CONVERSION

4.1      Conversion Right

         Upon and subject to the terms and conditions hereinafter set forth, the
Holder shall have the right (the "Conversion Right"), at any time up to and
including the earlier of the Early Termination Date or the Maturity Date, to
notify the Corporation that it wishes to exchange or convert all or any part of
this Debenture, including all or any part of the Obligations hereunder, into
fully paid non-assessable Common Shares at the Conversion Rate in effect on the
Issue Date.

         The Conversion Rate shall be $2.00 per Common Share to be issued upon
conversion of this Debenture. The Conversion Rate is subject to adjustment as
provided in Section 4.4.

         The Conversion Right shall extend only to the maximum number of whole
Common Shares into which the Obligations or any part thereof may be converted in
accordance with this Section 4.1. Fractional interests in Common Shares shall be
adjusted for in the manner provided in Section 4.5.

4.2      Conversion Procedure

         The Conversion Right may be exercised by the Holder by completing and
executing the notice of conversion (the "Conversion Notice") attached hereto as
Schedule "B". The Conversion Notice shall provide that the Conversion Right is
being exercised, shall include the portion of the Obligations in respect of
which the Conversion Right is being exercised, and shall set out the date (the
"Issue Date") on which Common Shares are to be issued upon the exercise of the
Conversion Right (such date to be no later than 10 Business Days after the date
on which the Conversion Notice is issued), and the name of the party (which must
be the Holder or a Participant, if applicable) who shall be the registered
holder of the Common Shares. On the Issue Date the required number of Common
Shares shall be issued
<PAGE>   10
                                     - 10 -


as fully paid and non-assessable shares of the Corporation and a certificate for
such shares shall be issued to the Person named in the Conversion Notice. If
less than all the Obligations are the subject of the Conversion Right, then on
the Issue Date the Corporation shall deliver to the Holder a replacement
Debenture for the amount of the Obligations which remain outstanding following
the exercise of the Conversion Right and the issuance of Common Shares in
connection therewith. If the Conversion Right is being exercised in respect of
all Obligations, this Debenture shall be surrendered to the Corporation for
cancellation.

4.3      Accrued and Unpaid Interest

         If this Debenture is surrendered for conversion in accordance with
Section 4.2 on an Issue Date which is between Interest Payment Dates, the Holder
shall be entitled to receive accrued and unpaid interest in respect of the
principal amount of this Debenture up to the Issue Date, and such interest shall
form part of the Obligations in respect of which the Conversion Right is
exercised.

4.4      Adjustment of Conversion Rate

         The Conversion Rate in effect at any date shall be subject to
adjustment from time to time as follows:

    (a)  If and whenever at any time prior to the earlier of the Early
         Termination Date or the Maturity Date, the Corporation shall:

           (i)  subdivide or redivide the outstanding Common Shares into a
                greater number of Common Shares;

          (ii)  reduce, combine or consolidate the outstanding Common Shares
                into a smaller number of Common Shares; or

         (iii)  issue Common Shares (or securities convertible into or
                exchangeable for Common Shares) to the holders of outstanding
                Common Shares by way of stock dividend;

         then the Conversion Rate in effect on the effective date of such
         subdivision, redivision, reduction, combination or consolidation or on
         the record date for such issue of Common Shares (or securities
         convertible into or exchangeable for Common Shares) by way of a stock
         dividend, as the case may be, shall in the case
<PAGE>   11
                                     - 11 -


         of the events referred to in clauses (i) and (iii) above, be decreased
         in proportion to the increase in the number of outstanding Common
         Shares resulting from such subdivision, redivision or dividend
         (including, in the case where securities convertible into or
         exchangeable for Common Shares are issued, the number of Common Shares
         that would have been outstanding had such securities been converted
         into or exchanged for Common Shares on such effective or record date)
         or, in the case of the events referred to in clause (ii) above, shall
         be increased in proportion to the decrease in the number of outstanding
         Common Shares resulting from such reduction, combination or
         consolidation on such effective or record date. Such adjustment shall
         be made successively whenever any event referred to in this subsection
         4.4(a) shall occur; any such issue of Common Shares (or securities
         convertible into or exchangeable for Common Shares) by way of a stock
         dividend shall be deemed to have been made on the record date for the
         stock dividend for the purpose of calculating the number of outstanding
         Common Shares under subsections 4.4(b) and 4.4(c) of this Section 4.4;
         and to the extent that any such securities are not converted into or
         exchanged for Common Shares prior to the expiration of the conversion
         or exchange right, the Conversion Rate shall be readjusted effective as
         of the date of such expiration to the Conversion Rate which would then
         be in effect based upon the number of Common Shares actually issued
         upon the exercise of such conversion or exchange right.

    (b)  If and whenever at any time prior to the earlier of the Early
         Termination Date or the Maturity Date the Corporation shall fix a
         record date for the issuance of rights, options or warrants to the
         holders of its outstanding Common Shares entitling them, for a period
         expiring not more than 25 trading days after such record date, to
         subscribe for or purchase Common Shares (or securities convertible into
         or exchangeable for Common Shares) at a price per Common Share (or
         having a conversion or exchange price per Common Share) less than 95%
         of the closing market price per Common Share on such record date, the
         Conversion Rate shall be adjusted immediately after such record date so
         that it shall equal the rate determined by multiplying the Conversion
         Rate in effect on such record date by a fraction, of which the
         numerator
<PAGE>   12
                                     - 12 -


         shall be the total number of Common Shares outstanding on such record
         date plus a number of Common Shares equal to the number arrived at by
         dividing the aggregate price of the total number of additional Common
         Shares offered for subscription or purchase (or the aggregate
         conversion or exchange price of the securities convertible into or
         exchangeable for Common Shares so offered) by the Current Market Price
         Per Share on such record date, and of which the denominator shall be
         the total number of Common Shares outstanding on such record date plus
         the total number of additional Common Shares offered for subscription
         or purchase (or into which the securities convertible into or
         exchangeable for Common Shares so offered are convertible or
         exchangeable). Any Common Shares owned by or held for the account of
         the Corporation shall be deemed not to be outstanding for the purpose
         of any such computation; such adjustment shall be made successively
         whenever such a record date is fixed; and to the extent that any such
         rights, options or warrants are not so issued or any such rights,
         options or warrants are not exercised prior to the expiration thereof,
         the Conversion Rate shall be readjusted effective as of the date of
         such expiration to the Conversion Rate which would then be in effect if
         such record date had not been fixed, or to the Conversion Rate which
         would then be in effect based upon the number of Common Shares (or
         securities convertible into or exchangeable for Common Shares) actually
         issued upon the exercise of such rights, options or warrants, as the
         case may be.

    (c)  If and whenever at any time prior to the earlier of the Early
         Termination Date or the Maturity Date the Corporation shall fix a
         record date for the making of a distribution to the holders of its
         outstanding Common Shares of (i) shares of any class other than Common
         Shares (or other than securities convertible into or exchangeable for
         Common Shares) and other than shares distributed to holders of Common
         Shares pursuant to their exercise of options to receive dividends in
         the form of such shares in lieu of dividends paid in the ordinary
         course on the Common Shares, or (ii) rights, options or warrants (other
         than rights, options or warrants referred to in subsection 4.4(b) and
         rights, options or warrants to subscribe for or purchase Common Shares
         (or other securities convertible into or exchangeable for Common
<PAGE>   13
                                     - 13 -


         Shares) for a period of not more than 25 trading days after such record
         date at a price per Common Share (or having a conversion or exchange
         price per Common Share) not less than 95% of the closing market price
         of a Common Share on such record date), or (iii) evidences of its
         indebtedness, or (iv) assets (excluding dividends paid in the ordinary
         course) then, in each such case, the Conversion Rate shall be adjusted
         immediately after such record date so that it shall equal the rate
         determined by multiplying the Conversion Rate in effect on such record
         date by a fraction, of which the numerator shall be the total number of
         Common Shares outstanding on such record date multiplied by the Current
         Market Price Per Share on such record date, less the fair market value
         (as determined by the Board of Directors with the approval of the
         Holder, which determination shall be conclusive) of such shares or
         rights, options or warrants or evidences of indebtedness or assets so
         distributed, and of which the denominator shall be the total number of
         Common Shares outstanding on such record date multiplied by such
         Current Market Price Per Share. Any Common Shares owned by or held for
         the account of the Corporation shall be deemed not to be outstanding
         for the purpose of any such computation; such adjustment shall be made
         successively whenever such a record date is fixed; to the extent that
         such distribution is not so made on or before the date fixed for
         distribution, the Conversion Rate shall be immediately readjusted to
         the Conversion Rate which would then be in effect if such record date
         had not been fixed or to the Conversion Rate which would then be in
         effect based upon such shares or rights, options or warrants or
         evidences of indebtedness or assets actually distributed, as the case
         may be; and in clause (iv) of this subsection 4.4(c) the term
         "dividends paid in the ordinary course" shall include the value of any
         securities or other property or assets distributed in lieu of cash
         dividends paid in the ordinary course at the option of shareholders.

    (d)  In the case of any reclassification of, or other change in, the
         outstanding Common Shares of the Corporation other than a subdivision,
         reduction, combination or consolidation, the Conversion Rate shall be
         adjusted in such manner, if any, and at such time, as the Board of
         Directors, with the approval of
<PAGE>   14
                                     - 14 -


         the Holder, determines to be appropriate on a basis consistent with
         this Section 4.4.

    (e)  In any case in which this Section 4.4 shall require that an adjustment
         shall become effective immediately after a record date for an event
         referred to herein, the Corporation may defer, until the occurrence of
         such event, issuing to the Holder the additional Common Shares issuable
         upon such conversion by reason of the adjustment required by such event
         before giving effect to such adjustment; provided, however, that the
         Corporation shall deliver to the Holder an appropriate instrument
         evidencing the Holder's right to receive such additional Common Shares
         upon the occurrence of the event requiring such adjustment and the
         right to receive any distributions made on such additional Common
         Shares declared in favour of holders of record of Common Shares on and
         after the Issue Date or such later date as the Holder would, but for
         the provisions of this subsection 4.4(e), have become the holder of
         record of such additional Common Shares pursuant to subsection 4.4(b).

    (f)  The adjustments provided for in this Section 4.4 are cumulative and
         shall apply to successive subdivisions, redivisions, reductions,
         combinations, consolidations, distributions, issues or any other event
         resulting in any adjustment under the provisions of this Section,
         provided that, notwithstanding any other provision of this Section, no
         adjustment of the Conversion Rate shall be required unless such
         adjustment would require an increase or decrease of at least 1% in the
         Conversion Rate then in effect; provided, however, that any adjustments
         which by reason of this subsection 4.4(f) are not required to be made
         shall be carried forward and taken into account in any subsequent
         adjustment.

    (g)  In the event of any question arising with respect to the adjustments
         provided in this Section 4.4, such question shall be conclusively
         determined by a firm of independent certified public accountants
         appointed by the Corporation and acceptable to the Holder; such
         accountants shall have access to all necessary records of the
         Corporation and such determination shall be binding upon the
         Corporation and the Holder.
<PAGE>   15
                                     - 15 -


    (h)  No adjustment in the Conversion Rate shall be made in respect of any
         event described in subsections 4.4(a)(iii), 4.4(b) or 4.4(c) if the
         Holder is entitled to participate in such event on the same terms
         mutatis mutandis as if it had converted this Debenture prior to the
         effective date or record date, as the case may be, of such event.

4.5      No Requirement to Issue Fractional Common Shares

         The Corporation shall not be required to issue fractional Common Shares
upon the conversion of any of the Obligations pursuant to this Article. If any
fractional interest in a Common Share would, except for the provisions of this
Section, be deliverable upon the conversion of any of the Obligations, the
Corporation shall, in lieu of delivering any certificate of such fractional
interest, satisfy such fractional interest by paying to the Holder an amount in
the lawful money of the United States equal (computed to the nearest cent) to
the appropriate fraction of the value (being the last reported sale price or, if
none, the mean between the closing bid and ask quotations on the American Stock
Exchange), or if the Common Shares are not then listed on the American Stock
Exchange, on such stock exchange on which the Common Shares are listed as may be
selected for such purpose by the Board of Directors, of a Common Share on the
Business Day next preceding the Issue Date. Notwithstanding the foregoing, the
Corporation shall be under no obligation to pay any amounts dollars for any such
fractional interest, if the value of such fractional interest would amount to a
sum less than $5.00.

4.6      Corporation to Reserve Common Shares

         The Corporation covenants with the Holder that it will at all times
reserve and keep available out of its authorized Common Shares, solely for the
purpose of issue upon exercise of the Conversion Right, and conditionally allot
to the Holder, such number of Common Shares as shall then be issuable upon the
conversion of this Debenture. The Corporation covenants with the Holder that all
Common Shares which shall be so issuable shall be duly and validly issued and
fully paid and non-assessable.

4.7      Certificate as to Adjustment

         The Corporation shall from time to time, immediately after the
occurrence of any event which requires an adjustment or readjustment as provided
in Section 4.4, deliver an Officers'
<PAGE>   16
                                     - 16 -


Certificate to the Holder specifying the nature of the event requiring the same
and the amount of the adjustment necessitated thereby and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based, which certificate and the amount of the adjustment
specified therein shall be verified by an opinion of a firm of independent
certified public accountants appointed by the Corporation and acceptable to the
Holder (who may be the auditors of the Corporation) and, when approved by the
Holder, shall be conclusive and binding on all parties in interest.

4.8      Holder of Record

         For all purposes, on each Issue Date, the Holder (or a Participant, if
applicable) shall be deemed to have become the holder of record of the Common
Shares into which the Obligations (or a portion thereof) are converted in
accordance with Section 4.2 upon the delivery of the certificate or certificates
representing such Common Shares, being issued to the Holder (or a Participant,
if applicable).

                                   ARTICLE V
                      EARLY TERMINATION OF CONVERSION RIGHT

5.1      Termination of Conversion Right

         The Corporation may terminate the Conversion Right at any time after
December 31, 2002 if the average closing price per share of the Common Shares on
the American Stock Exchange or other applicable exchange, market or quotation
system for the 20 consecutive trading days ending five trading days preceding
the date on which notice of termination is given pursuant to Section 5.2 is not
less than 200% of the Conversion Rate. The Conversion Right shall terminate
automatically 30 days after the date such notice of termination is received by
the Holder (the "Early Termination Date"). The average closing price per share
shall be determined by dividing the sum of the daily closing prices of the
Common Shares sold on the said exchange, market or quotation system during the
said 20 consecutive trading days by 20. If the Common Shares are not being
traded on an exchange or market at the applicable time then the daily closing
price per Common Share shall be a price determined in good faith by the Board of
Directors on the written advice of an investment banking firm selected by the
Corporation and acceptable to the Holder acting reasonably. For greater
certainty, the Conversion Right may be exercised by the Holder pursuant to
Section 4.1 at any time during such 30 day notice period until the Early
Termination Date.
<PAGE>   17
                                     - 17 -


5.2      Notice of Termination

         Written notice of termination of the Conversion Right shall be given by
or on behalf of the Corporation to the Holder in the manner provided in Section
11.9. The notice of termination shall specify the Early Termination Date and the
calculations made pursuant to Section 5.1 hereof.

                                   ARTICLE VI
                         REPRESENTATIONS AND WARRANTIES

6.1      Representations and Warranties of the Corporation

         The Corporation hereby represents and warrants to the Holder, as of the
date hereof (and acknowledges that the Holder is relying on such representations
and warranties in entering into this Debenture and the transactions contemplated
hereby), the representations and warranties set out in Schedule "C" to this
Debenture. The Corporation shall also be deemed to make each of the
representations and warranties set out in paragraphs 1, 2, 3, and 4 of Schedule
"C" hereto on and as of each day from the date hereof to the date on which all
Obligations have been paid and satisfied in full. The Corporation agrees that
the representations and warranties made by the Corporation and the Holder's
ability to rely on them, are not affected or qualified in any way by the
Holder's actual knowledge.



6.2      Nature and Survival

         The representations and warranties contained in this Debenture made by
the Corporation shall survive (as of the date each such representation and
warranty is or is deemed to be made in accordance with Section 6.1) the Closing
Date for a period expiring on the earlier of (i) twelve months from the date on
which all Obligations are converted, and (ii) July 1, 2005. If no claim is made
under this Debenture against a party for any inaccuracy in, or breach of, any
representation or warranty made in this Debenture, prior to the expiry of this
survival period, such party shall have no further liability under this Debenture
with respect to such representation or warranty.
<PAGE>   18
                                     - 18 -


                                   ARTICLE VII
                                    COVENANTS

7.1      General Covenants

         The Corporation covenants with the Holder that so long as this
Debenture remains outstanding it will at all times carry on and conduct and will
cause to be carried on and conducted its business in the same manner as
heretofore carried on and conducted, provided, however, that subject to Article
VIII hereunder, the Corporation or any Subsidiary of the Corporation may cease
to carry on a business or may dispose of any business, premises, property or
operation if, in the reasonable opinion of the Board of Directors or the board
of directors any Subsidiary of the Corporation, as the case may be, it would be
advisable and in the best interest of the Corporation or any Subsidiary of the
Corporation so to do.

7.2      Payment of Principal and Interest

         The Corporation declares, covenants and agrees that the Corporation
will duly and punctually pay the principal of, and interest accrued on, this
Debenture, at the time and in the manner specified hereby.

7.3      Performance Under Debenture

         The Corporation shall duly and punctually perform and carry out all of
the acts or things to be done by it as provided for in this Debenture.

7.4      Continued Listing

         The Corporation shall take all such steps and actions and do all such
things that are within its control that are required to maintain the listing and
posting for trade of the Common Shares on the American Stock Exchange and to
maintain its status as a listed company not in default under the requirements of
applicable securities Laws.

7.5      Securities Qualification Requirements

         If, in the opinion of counsel to the Holder, any prospectus or other
instrument is required to be filed with or any permission is required to be
obtained from any securities regulatory authority or any other step is required
under any federal or state Law of the United States before any Common Shares
which the Holder is entitled to receive pursuant to this Debenture may properly
and legally be delivered upon the due
<PAGE>   19
                                     - 19 -


exercise of the Conversion Right, the Corporation covenants that it will take
all such action, at its expense, as is required or appropriate in the
circumstances.

7.6      Registration Rights

         The Corporation and the Holder shall enter into an amendment of the
registration rights agreement (the "Amended Registration Rights Agreement")
amending the registration rights agreement (the "Registration Rights Agreement")
between the Corporation and IPC Advisors S.a.r.l. dated October 8, 1999 to the
effect that, upon their issuance, the Common Shares issuable to the Holder
pursuant to this Debenture shall be deemed to be "Registrable Securities" under
the Registration Rights Agreement.

7.7      Taxation

         The Corporation shall make all payments of principal and interest
(including interest on amounts in default) on this Debenture without withholding
of or deduction for or on account of any present or future Taxes imposed or
levied by any Taxing Authority unless such Taxes are required to be withheld or
deducted by the Corporation by Law or by the interpretation or administration
thereof, or upon demand of the Taxing Authority. Whenever in this Debenture the
Corporation is obligated to make a payment in respect of which it is so required
to withhold or deduct a sum in respect of Taxes, the provision shall be read and
construed so as to permit such deduction or withholding (whether or not
explicitly stated in connection with the particular payment obligation).

         The Corporation shall make any withholdings or deductions in respect of
Taxes required by Law or by the interpretation or administration thereof and
shall remit the full amount withheld or deducted to the relevant Taxing
Authority in accordance with applicable Law and shall provide the Holder with
full particulars thereof.

7.8      Use of Proceeds

         The Corporation agrees that the funds received by the Corporation upon
the issuance of this Debenture shall be used by the Corporation for the purposes
set out in the business plan of the Corporation approved from time to time by
the Board of Directors.
<PAGE>   20
                                     - 20 -


7.9      HSR Act

         The parties shall exercise all commercially reasonable efforts to make
all filings, if any, the cost of which filings shall be borne equally by the
Holder and the Corporation, with the Federal Trade Commission and the Antitrust
Division of the United States Department of Justice under the HSR Act in order
to satisfy the requirements thereof, and to address any concerns of such
authorities, to permit the transactions contemplated by this Debenture.

7.10     Consents and Approvals

         The Corporation agrees that it will use all commercially reasonable
efforts to obtain all authorizations, waivers, exemptions, consents, orders and
other approvals from applicable authorities and other Persons as are necessary
to consummate the transactions contemplated hereby, and to satisfy each of the
conditions precedent to be satisfied by it and to take or cause to be taken all
other action and to do or cause to be done all other things necessary or
advisable under applicable Laws to permit the completion of the transactions
contemplated hereby in accordance with the provisions of this Debenture. The
Corporation will vigorously defend or cause to be defended any lawsuits or other
proceedings that may be brought against it challenging or opposing this
Debenture or the transactions contemplated hereby.

7.11     Public Announcements

         Each party agrees that, except as may be required by law, it shall not
disclose this Debenture or the transactions contemplated hereby to any other
Person (other than its directors, officers, employees and advisors who are
advised of and agree to be bound by these confidentiality provisions). Without
limiting the generality of the foregoing, each party agrees that, to the extent
permitted by law, it shall not make any public announcement or regulatory filing
disclosing this Debenture or the transactions contemplated hereby without the
prior approval of such announcement or regulatory filing by the other, such
approval not to be unreasonably withheld or delayed.

7.12     Notification

         During the survival period referred to in Section 6.2, each party will
promptly notify the other if any of the representations and warranties made by
it in this Agreement ceases to be true, accurate and complete in any material
respect
<PAGE>   21
                                     - 21 -

and of any failure to comply in any material respect with any of its obligations
hereunder.

                                  ARTICLE VIII
                               SUCCESSOR ENTITIES

8.1      Certain Requirements

         The Corporation, without the Holder's prior written consent which
consent shall not be unreasonably withheld, shall not enter into any transaction
(including by way of reorganization, amalgamation, merger, liquidation,
transfer, sale or otherwise) whereby all or substantially all of its property
and assets would become the property of any other person, or any entity
resulting therefrom (but excluding, for greater certainty, a transfer or sale of
shares in the capital of the Corporation, provided that such transfer or sale
does not affect the corporate existence or capacity of the Corporation), unless:

    (a)  the successor entity shall execute, prior to or contemporaneously with
         the consummation of such transaction, such instruments, if any, as are
         in the opinion of counsel to the Holder necessary or advisable to
         evidence the assumption by the successor entity of liability for the
         due and punctual payment of the Debenture, interest thereon and all
         other monies payable hereunder, the covenant of the successor entity to
         pay the same and the agreement of the successor entity to observe and
         perform all the covenants and obligations of the Corporation under this
         Debenture;

    (b)  such transaction, in the opinion of counsel to the Holder, shall be
         upon such terms as to substantially preserve and not impair any of the
         rights and powers of the Holder hereunder, provided that the rights of
         the Holder shall be deemed not to have been impaired by reason only of
         the adjustments contemplated in Section 4.4;

    (c)  no condition or event shall exist in respect of the successor entity at
         the time of such transaction or after giving full effect thereto which
         constitutes or would constitute an Event of Default hereunder; and
<PAGE>   22
                                     - 22 -


    (d)  the successor entity has a net worth equal to or greater than the net
         worth of the Corporation as of the date hereof.

8.2      Vesting of Powers in Successor

                  Whenever the conditions of Section 8.1 have been duly observed
and performed: (a) the successor entity shall possess and from time to time may
exercise each and every right and power of the Corporation under this Debenture
in the name of the Corporation or otherwise and any act or proceeding by any
provision of this Debenture required to be done or performed by any trustees or
officers of the Corporation may be done and performed with like force and effect
by the directors, trustees or officers of such successor entity; and (b) the
Corporation shall be released and discharged from liability under this Debenture
and the Holder may execute any documents which it may be advised are necessary
or advisable for effecting or evidencing such release and discharge.

                                   ARTICLE IX
                                EVENTS OF DEFAULT

9.1      Events of Default

         Any of the following shall constitute an Event of Default under this
Debenture:

    (a)  failure by the Corporation to pay all or any part of the Obligations
         when due and payable;

    (b)  a material default occurs pursuant to any agreement, contract,
         instrument, license or other document pursuant to which the Corporation
         has obligations to a Person other than the Holder which has not been
         waived or cured in accordance with the terms of such agreement,
         contract, instrument, lease, license or other document; for purposes of
         this subsection 9.1(b), a default shall be deemed to be material if it
         does or could reasonably be expected to result in damages, losses,
         costs, liabilities or acceleration of obligations equal to or greater
         than $750,000;

    (c)  the Corporation breaches in any material respect any term, covenant or
         agreement contained in this Debenture;
<PAGE>   23
                                     - 23 -


    (d)  any representation or warranty made hereunder by the Corporation shall
         be untrue or incorrect when made or deemed to be made;

    (e)  the Common Shares cease to be listed for trading on the American Stock
         Exchange other than solely as a direct result of (i) purchases of
         Common Shares in the secondary market by the Holder or its affiliates
         or (ii) a transaction described in Article VIII to which the Holder has
         given its written consent;

    (f)  the occurrence of a Material Adverse Effect on or after the date
         hereof;

    (g)  a decree or order of a court having jurisdiction is entered
         adjudicating the Corporation a bankrupt or insolvent under any
         bankruptcy, insolvency or analogous Laws or issuing sequestration or
         process of execution against the property, or any part thereof which is
         in the determination of the Holder a substantial part of the property,
         of the Corporation or appointing a receiver of the property, or of any
         part thereof which is in the determination of the Holder a substantial
         part of the property, of the Corporation or ordering the winding-up or
         liquidation of the affairs of the Corporation and enforcement of any
         such aforesaid decree or order continues unstayed and in effect for a
         period of 60 days after notice of such decree or order is received by
         the Corporation; or

    (h)  a resolution is passed for the winding-up or liquidation of the
         Corporation or if the Corporation institutes proceedings to be
         adjudicated a bankrupt or insolvent or consents to the filing of any
         such petition or to the appointment of a receiver or receiver and
         manager of its property or any part thereof which is in the
         determination of the Holder a substantial part thereof, or makes a
         general assignment for the benefit of creditors or admits in writing
         its inability to pay its debts generally as they become due or takes
         corporate action in furtherance of any of the aforesaid purposes.

9.2      Notice of Event of Default

         The Corporation will give notice in writing to the Holder of the
occurrence of any Event of Default or other event
<PAGE>   24
                                     - 24 -


which, with the lapse of time or giving of notice or otherwise, would be an
Event of Default, forthwith upon becoming aware thereof. Such written notice
shall specify the nature of such default or Event of Default and the steps taken
to remedy the same.

                                   ARTICLE X
                                    REMEDIES

10.1     Automatic Consequences of an Event of Default

         Upon the occurrence of an Event of Default, in the case of an Event of
Default specified in subsection 9.1(c) or (f), the Corporation shall, if such
Event of Default is capable of being cured, have 20 Business Days from the date
of such Event of Default in which to cure the Event of Default, and in the case
of an Event of Default specified in Section 9.1(d), the Corporation shall, if
such Event of Default is capable of being cured, have 2 Business Days from the
date of such Event of Default in which to cure the Event of Default, failing
which the Obligations shall immediately be due and payable by the Corporation to
the Holder, and in the case of all other Events of Default (without any cure
period) the Obligations shall immediately be due and payable by the Corporation
to the Holder, and in all cases the Corporation shall pay forthwith to the
Holder an amount equal to the Obligations then outstanding under this Debenture
without the necessity of any further act or formality.

10.2     Waiver of Default

         If an Event of Default shall have occurred and is continuing the Holder
may in writing (and only in writing) waive such Event of Default hereunder and
no waiver of a particular Event of Default by the Holder shall extend to or be
taken in any manner whatsoever to effect any subsequent Event of Default
hereunder with the rights of the Holder resulting therefrom.

                                   ARTICLE XI
                                  MISCELLANEOUS

11.1     Expenses

    (a)  The Corporation shall reimburse the Holder on the Holder's request for
         legal fees and disbursements incurred in connection with the
         preparation and settlement of this Debenture and the completion of the
<PAGE>   25
                                     - 25 -


         transactions contemplated thereby, up to a maximum of $50,000.

    (b)  The Corporation shall also pay to the Holder on demand all of the
         Holder's reasonable costs, charges and expenses in connection with the
         enforcement by any means of any provisions hereof or the exercise of
         any rights, powers or remedies hereunder.

11.2     Discharge of Debenture

         After the Obligations have been paid and satisfied in full or the
Conversion Right has been exercised with respect to any portion of the
Obligations, the Holder shall, at the written request and expense of the
Corporation, cancel and discharge this Debenture with respect to any portion of
the Obligations so paid or converted and execute and deliver to the Corporation
such instruments as shall be necessary to discharge this Debenture. For
certainty, upon full repayment of the Obligations, all rights of the Holder
hereunder shall terminate.

11.3     No Obligation to Advance

         Neither the issue nor delivery of this Debenture shall obligate the
Holder to advance any funds, or otherwise make or continue to make any credit
available, to the Corporation.

11.4     Dealings with Others

         The Holder may grant extensions of time and other indulgences, take and
give up security, accept compositions, make settlements, grant releases and
discharges and otherwise deal with the Corporation, debtors of the Corporation,
sureties and other Persons as the Holder sees fit, without prejudice to any
debts and liabilities of the Corporation to the Holder or the rights, powers and
remedies of the Holder under this Debenture.

11.5     Time of Essence

         Time shall be of the essence in this Agreement.

11.6     Entire Agreement

         This Agreement constitutes the entire agreement among the parties
hereto relating to the subject matter hereof and supersedes all oral statements
and prior writings with respect hereto.
<PAGE>   26
                                     - 26 -


11.7     No Inconsistent Agreements

         The Corporation will not hereafter enter into any agreement which is
inconsistent with, or would otherwise restrict the performance by the
Corporation of its obligations hereunder.

11.8     Successors and Assigns

         This Debenture shall be binding on the Corporation and its successors
and shall enure to the benefit of the Holder and its successors and assigns. The
Obligations shall be paid, and subject to Section 1.2, this Debenture shall be
assignable by the Holder, free of any set-off, counter-claim or equities between
the Corporation and the Holder.

11.9     Notice

         Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be given by prepaid first-class mail, by
facsimile or other means of electronic communication or by hand-delivery as
hereinafter provided. Any such notice or other communication, if mailed by
prepaid first-class mail at any time other than during a general discontinuance
of postal service due to strike, lock-out or otherwise shall be deemed to have
been received on the fourth (4th) Business Day after the post-marked date
thereof, or if sent by facsimile or other means of electronic communication,
shall be deemed to have been received on the Business Day following the sending,
or if delivery by hand shall be deemed to have been received at the time it is
delivered to the applicable address noted below either to the individual
designated below or to an individual at such address having apparent authority
to accept deliveries on behalf of the addressee. Notice of change of address
shall also be governed by this section. In the event of a general discontinuance
of postal service due to strike, lockout or otherwise, notices or other
communications shall be delivered by hand or sent by facsimile or other means of
electronic communication and shall be deemed to have been received in accordance
with this section. Notices and other communications shall be addressed as
follows:
<PAGE>   27
                                     - 27 -


    (a)  if to the Corporation

          Balanced Care Corporation
          1215 Manor Drive
          Mechanicsburg, PA  17055
          U.S.A.

          Attention:      Robin L. Barber
          Telecopier:     (717) 796-6294

         with a copy to:

          Kirkpatrick & Lockhart LLP
          Henry W. Oliver Building
          535 Smithfield Street
          Pittsburgh, PA  15222
          U.S.A.

          Attention:      Kristen Larkin Stewart, Esq.
          Telecopier:     (412) 355-6501

    (b)  if to the Purchaser:

          VXM Investments Limited
          c/o Unsworth & Associates
          Herengracht 483, 1017 BT
          Amsterdam, Netherlands

          Attention:      J. B. Unsworth
          Telecopier:     011-31-20-623-2285

         with a copy to:

          Manfred J. Walt
          c/o Central Park Lodges Ltd.
          175 Bloor Street East
          South Tower
          Toronto, Ontario
          M4W 3R8

          Attention:      Manfred J. Walt
          Telecopier:     (416) 323-3818
<PAGE>   28
                                     - 28 -


         with a further copy to:

          Goodman Phillips & Vineberg
          250 Yonge Street, Suite 2400
          Toronto, Ontario
          M5B 2M6

          Attention:      Stephen Pincus
          Telecopier:     (416) 979-1234
<PAGE>   29
                                     - 29 -


11.10    Execution and Counterparts

         For the convenience of the parties, this Agreement may be executed by
facsimile or otherwise in several counterparts, each of which when so executed
shall be, and be deemed to be, an original instrument and such counterparts
together shall constitute one in the same instrument.

         IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereof on the date first indicated above.


                                            BALANCED CARE CORPORATION


                                            Per:/s/Robin L. Barber
                                                   Robin L. Barber
                                                   Senior Vice President and
                                                   Legal Counsel & Assistant
                                                   Secretary




                                            VXM INVESTMENTS LIMITED


                                            Per:/s/J. B. Unsworth
                                                   J. B. Unsworth,
                                                   Manager