HEALTH MANAGEMENT INC/DE, 10-Q, 1996-09-16

HEALTH MANAGEMENT INC/DE
10-Q, 1996-09-16
DRUG STORES AND PROPRIETARY STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended July 31, 1996 Commission File No. 0-18472

HEALTH MANAGEMENT, INC.

(Exact name of registrant as specified in charter)

Delaware 75-2096632
(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)

1371-A Abbott Court, Buffalo Grove, Illinois 60089
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (847) 913-2700

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 X NO

As of September 13, 1996, there were outstanding 9,330,182 shares of common
stock, $.03 par value.

HEALTH MANAGEMENT, INC.

July 31, 1996

TABLE OF CONTENTS

Page No.
Part I. FINANCIAL INFORMATION:

Item 1. Financial Statements . . . . . . . . . . . . . . . . . .

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . .

Part II. OTHER INFORMATION:

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . .

Item 2. Changes in Securities . . . . . . . . . . . . . . . . . .

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . .

Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . .

Item 5. Other Information . . . . . . . . . . . . . . . . . . . .

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . .

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . .

PART I.FINANCIAL INFORMATION

Item 1. Financial Statements

The condensed consolidated financial statements of Health Management,
Inc. (the "Company") begin on the page following Item 2 of this
Part I.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

PRELIMINARY STATEMENT

All statements contained herein that are not historical facts, including, but
not limited to, statements regarding the Company's current business strategy,
the Company's projected sources and uses of cash, and the Company's plans for
future development and operations, are based upon current expectations. These
statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigation and
investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general businesses and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Litigation Reform Act of 1995 and, as such, speak only as of the date made.

SPECIAL CONSIDERATIONS

The Company's business is subject to a number of special considerations, such as
industry trends, certain risks inherent in the business and the Company's recent
events. Some of these considerations are described in "Recent Events and Other
Considerations" below.

RECENT EVENTS AND OTHER CONSIDERATIONS

Significant Litigation. The Company has been named as a defendant in several
class action lawsuits and as a nominal defendant in two derivative suits. No
assurances can be given as to the outcome of such litigation and the effects on
the financial condition or future results of operations of the Company. However,
the Company is in the process of negotiating the final terms of a Stipulation
of Settlement with the plaintiffs' counsel in this case. (See Part II, Item 1.
"Legal Proceedings".)

Changes in Management. Effective May 1, 1996, W. James Nicol, an experienced
health care executive, was named President and Chief Executive Officer of the
Company, succeeding the office of the Chief Executive Officer of the Company
which was formed when Clifford E. Hotte resigned in February 1996. James R.
Mieszala, formerly of Caremark, Inc., who became President of Homecare
Management, Inc., a wholly-owned operating subsidiary of the Company, in January
1996, was named Chief Operating Officer of the Company effective May 10, 1996.
Paul S. Jurewicz, formerly of Caremark, Inc., who became Chief Financial Officer
of the Company in December 1995 was also named the Executive Vice President of
the Company in April 1996. The Company has experienced substantial turnover of
its senior management group over the past twelve months and several of the
Company's executive officers have been in their current positions for only a
limited period of time. The Company's future growth and success depends, in
large part, upon its ability to obtain, retain and expand its staff of executive
and professional personnel. There can be no assurances that the Company will be
successful in its efforts to attract and retain such personnel.

Financial Condition. As a result of the restatements and special charges
recorded in the Company's financial statements for the fiscal years 1995 and
1996, the Company recorded significant changes to its balance sheet including
reductions of the Company's working capital, retained earnings and stockholders'
equity. The Company is presently in default under its Credit Agreement with
Chase Manhattan Bank, N.A., as agent and lender. Accordingly, all long term
debt has been reclassified as a current liability on the Company's condensed
consolidated balance sheets. The Company has executed a Forbearance Agreement
dated July 26, 1996 with its lenders which provides that, subject to certain
conditions, the lenders agree not to exercise their rights and remedies under
the Credit Agreement until November 15, 1996. Also, following the restatements,
the conversion feature of the $3 million Convertible Subordinated Note held by
Caremark, Inc. was triggered; however, Caremark, Inc. has not indicated an
intent to exercise its right to convert the note. The conversion of such note
is related to the price of the Company's Common Stock at the time of conversion.
In pursuance of additional financing to remedy the default condition under the
Credit Agreement, the Company has recently engaged National Westminster Bank Plc
to act as its financial advisor to explore a variety of strategic and financial
alternatives. The Company may engage in a public or private offering of
securities or a merger of the Company; however, there can be no assurances that
such an offering or merger will be consummated. Furthermore, the successful
consummation of such financing could result in substantial dilution of the
Company's existing shares and could involve a higher cost of financing.

Goodwill and Other Long Lived Assets. At July 31, 1996, the Company had
goodwill of approximately $33.7 million, or 36% of its assets. A significant
portion of the Company's goodwill relates to the Clozaril Patient Management
Business ("CPMB"). It is the Company's policy to review the recoverability of
goodwill and other long-lived assets quarterly to determine if any impairment
indicators are present. The evaluation of the recoverability of goodwill is
significantly affected by estimates of future cash flows from each of the
Company's market areas. If estimates of future cash flows from operations
decrease, the Company may be required to write down its goodwill and other long-
lived assets in the future. Any such write-down could have a material adverse
effect on the financial position and results of operations of the Company.

Business Strategy. The Company's strategy, which it has been in the process of
implementing since May 1996, is focused on the basic factors that could improve
profitability: revenue generation, cost reduction, quality improvement and cash
collections. To generate increased revenue, the Company is directing its
marketing efforts towards improving its referral relationships in addition to
developing new programs, expanding relationships with payor organizations
(including managed care organizations) and forging relationships with
pharmaceutical companies requiring services such as clinical management,
marketing, reimbursement and other services. Cost reduction efforts are focused
on the integration of the Company's pharmacy locations and increasing
efficiencies in reimbursement and distribution services. Management is also
concentrating on improved cash collections through an emphasis on enhancing
systems capabilities within the Company. While management believes the
commencement of this strategy has improved and will continue to improve the
Company's operations and financial performance, no assurances can be given to
its ultimate success.

Internal Controls. The Company has initiated several actions to improve its
internal controls and to enhance its financial reporting and analytical
capabilities. These controls include the implementation on July 1, 1996 of a
perpetual inventory system which management believes should provide both better
controls over the management of on hand inventory and automate the recording of
cost of sales at time of product shipment.

Effective June 1, 1996, the Company transitioned to a single general ledger
system which is intended to improve control over the financial consolidation
process and increase the Company's ability to analyze its business operations.
The finance function of the Company has been consolidated in its Buffalo Grove,
Illinois facility as of July 1996.

Management believes that this consolidation will allow for improved
communications, focused management and a better ability to closely monitor the
financial operations of the Company. The Company also plans to consolidate from
the several accounts receivable systems currently in place to a single system
during the fiscal year 1997. With this new accounts receivable system, the
Company expects to improve the efficiency and effectiveness of its cash
collection activities. There can be no assurances of the impact of these
internal controls on the Company or whether they will be effective.

Potential Dilution. The Company may issue additional shares of the Company's
capital stock in order to obtain financing, in satisfaction of other current or
future liabilities of or litigation involving the Company, upon conversion of
the Convertible Subordinated Note held by Caremark, Inc. or otherwise. These
additional issuances could result in substantial dilution of the Company's
existing shares.

RESULTS OF OPERATIONS

Three months ended July 31, 1996 versus July 31, 1995

The Company's revenues were $40,522,910 for the quarter ended July 31, 1996, an
increase of $2,228,880 or 5.8% over revenues of $38,294,030 for the three months
ended July 31, 1995. The increase in revenues was derived from internal growth
resulting from the expansion of the Lifecare Program into new disease states,
ongoing patient referrals from existing referral sources, and the addition of
new referral sources over the course of the quarter.

Gross profit margins were 25.9% for the quarter ended July 31, 1996, as compared
to 30.7% for the quarter ended July 31, 1995. The decrease in the gross profit
rate represents an overall reduction in reimbursement rates from third party
payors. The significance of the decline has been reduced as evidenced by the
25.9% level recorded in the quarter ended July 31, 1996 versus the 25.7% level
recorded in the quarter ended April 30, 1996,

Operating expenses for the quarter ended July 31, 1996 were $9,087,981, an
increase of $638,365 or 7.6% over the quarter ended July 31, 1995. This
increase was principally attributable to increased legal expenses associated
with the ongoing shareholder litigation and related issues; legal expenses for
the quarter ended July 31, 1996 were approximately $700,000.

Income from operations for the quarter ended July 1996 was $1,424,036, a
decrease of $1,887,144 or 57% from the quarter ended July 31, 1995. The decline
in the gross profit rate from 1996 to 1997 of 4.8 percentage points is the
primary reason for the decline in income from operations.

Interest expense for the quarter ended July 31, 1996 was $739,537, an increase
of $128,601 or 21.1% over the quarter ended July 31, 1995. This increase is
attributable to increased borrowings under the Company's line of credit
partially offset by reduced interest expense related to the Company's term loan.

Income before income taxes for the quarter ended July 31, 1996 was $684,499, a
decrease of $2,015,745 or 74.7%, from the quarter ended July 31, 1995. The
decrease is attributable to the reduced gross profit margins and increased
operating and interest expenses.

Net income for the quarter ended July 31, 1996 was $431,888, a decrease of
$1,156,850 or 72.8%, from the quarter ended July 31, 1995.

Primary and fully diluted earnings per common share for the quarter ended July
31, 1996 were both $0.05 compared to earnings per share of Common Stock of $0.17
for the quarter ended July 31, 1995. The weighted average number of shares
outstanding used in the calculation of primary and fully diluted earnings per
share were 9,328,240 and 9,333,528, respectively, for the quarter ended July 31,
1996 and 9,444,919 for the quarter ended July 31, 1995.

LIQUIDITY AND CAPITAL RESOURCES

The net decrease of $1,694,493 in the Company's cash and cash equivalents to
$1,585,702 at July 31, 1996 was attributable to cash used in operating
activities.

Working capital at July 31, 1996 was $3,142,568, an increase of $650,949 from
April 30, 1996. Current assets decreased $2,768,171 due to a decrease in cash
and cash equivalents of $1,694,493, an increase in accounts receivable of
$502,146, a decrease in tax refund receivable of $2,285,530, an increase in
inventory of $411,211, an increase in deferred taxes of $550,000 and a decrease
in prepaid expenses of $251,505.

Current liabilities decreased $3,419,120 principally due to a decrease in
accounts payable of $2,266,700 and a decrease in accrued unusual charges of
$1,408,304.

To facilitate the acquisition of the Clozaril Patient Management Business in
March 1995, the Company borrowed $21,000,000 in the form of term loans and
delivered a $3,000,000 Convertible Subordinated Note to Caremark, Inc. As of
July 31, 1996, $18,000,000 was outstanding on the term loan and approximately
$10,300,000 was outstanding on the Company's line of credit. The Company is in
default under the Credit Agreement. The Company has executed a Forbearance
Agreement with its lenders in which the lenders agree, under certain conditions,
not to exercise their rights under the original loan through the period ended
November 15, 1996. The Company needs to obtain additional financing to resolve
its default condition.

The Company has engaged National Westminster Bank Plc to act as its financial
advisor to explore a variety of strategic and financial alternatives. The
Company may engage in a public or private offering of securities or a merger of
the Company; however, there can be no assurance that such an offering or merger
will be consummated. Furthermore, the successful consummation of such financing
could result in substantial dilution of the Company's existing shares.

The Company purchases its pharmaceuticals from wholesalers and, to a lesser
degree, directly from pharmaceutical manufacturers. Its sources have
established credit limitations and a few suppliers are seeking to reduce their
credit limitations with the Company. Additionally, one supplier, Bindley
Western Industries, Inc., has initiated legal action against the Company
regarding past amounts due. (See Part II, Item 1. "Legal Proceedings".) The
Company's primary supplier, Foxmeyer Drug Company, recently filed for protection
under the Federal Bankruptcy laws. Although the Company has been able to
maintain adequate product supply within the credit limitations, there can be no
assurances it will continue to do so in the future. Such an inability would
have a material adverse impact on the Company if alternative sources of product
supply were inadequate.

If the Company is unsuccessful in obtaining financing, in reaching a successful
outcome in its current litigation or in continuing satisfactory relations with
its suppliers, it may have to consider protection under the Federal Bankruptcy
laws.

HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES

Index to Condensed Consolidated Financial Statements

Page No.

Balance Sheets as of July 31, 1996 (Unaudited)
and April 30, 1996 (Audited) . . . . . . . . . . . . . . . . . . . . . . .

Statements of Income for the Three Months Ended
July 31, 1996 and July 31, 1995 (Unaudited) . . . . . . . . . . . . . . . . .

Statement of Cash Flow for the Three Months Ended July 31, 1996 (Unaudited) .

Statement of Stockholders' Equity for the Three Months
Ended July 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . .

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . .

HEALTH MANAGEMENT, INC.
And Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
<TABLE>
<CAPTION>
July 31, 1996 April 30, 1996
(Unaudited) (Audited)

<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,585,702 $3,280,195

Accounts Receivable, Less Allowance for
Doubtful Accounts 36,959,345 36,457,199
Inventories 7,212,031 6,800,820
Tax Refund Receivable 5,751,500 8,037,030
Deferred Taxes 2,357,000 1,807,000
Prepaid expenses and other 403,853 655,358
__________ __________
Total Current Assets 54,269,431 57,037,602

IMPROVEMENTS and EQUIPMENT, Less
Accumulated Depreciation and
Amortization 3,680,009 3,825,974

Goodwill 33,711,294 34,008,496

OTHER 1,167,110 1,043,607

$92,827,844 $95,915,679

See Notes to Condensed Consolidated Financial Statements

</TABLE>

HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY

July 31, 1996 April 30, 1996
(Unaudited) (Audited)

<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $18,448,136 $20,714,836
Accrued Unusual Charges 2,150,696 3,559,000
Accrued Expenses 1,778,096 1,526,119
Current Maturities of
Long Term Debt 28,749,935 28,746,028

TOTAL CURRENT LIABILITIES 51,126,863 54,545,983

Long Term Debt, Less Current
Maturities 3,905,474 4,006,077

TOTAL LIABILITIES 55,032,337 58,552,060

COMMITMENTS and CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred Stock-$.01 Par Value:
Shares Authorized - 1,000,000
Issued and Outstanding, none
Common Stock-$.03 Par Value:
Shares Authorized - 20,000,000
Issued and Outstanding-9,328,240 279,848 279,848
Additional Paid-in Capital 38,138,771 38,138,771
Accumulated Deficit (623,112) (1,055,000)

TOTAL STOCKHOLDERS' EQUITY 37,795,507 37,363,619

$92,827,844 $95,915,679

See Notes to Condensed Consolidated Financial Statements

</TABLE>

HEALTH MANAGEMENT, INC.

And Subsidiaries

Condensed Consolidated Statements of Income
(Unaudited)

Three Months Ended July 31

1996 1995

<S> <C> <C>
Revenues $40,522,910 $38,294,030
Cost of Sales 30,010,893 26,533,234

Gross Profit 10,512,017 11,760,796

Operating Expenses:

Selling 1,233,317 1,085,202
General and Administrative
7,854,664 7,364,414

9,087,981 8,449,616

Income from Operations 1,424,036 3,311,180

Interest Expense 739,537 610,936

Income Before Income Taxes 684,499 2,700,244

Income Taxes 252,611 1,111,506

Net Income $431,888 $1,588,738

Earnings Per Common Share:
Primary $0.05 $0.17
Fully Diluted $0.05 $0.17

Weighted Average Shares Outstanding
Primary 9,328,240 9,444,919
Fully Diluted 9,333,528 9,444,919

See Notes to Condensed Consolidated Financial Statements

</TABLE>

HEALTH MANAGEMENT, INC.
And Subsidiaries

Condensed Consolidated Statement of Cash Flow
For The Three Months Ended July 31
<TABLE>
<CAPTION>

(Unaudited)
1996 1995
<C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $431,888 $1,588,738
Adjustments to Reconcile Net
Income to Net Cash provided by (used in)
Operating Activities:
Depreciation & Amortization 646,345
653,391
Provision for Doubtful Accounts 1,634,915 1,814,812
Deferred Taxes (550,000) (24,321)
Increase (Decrease) in Cash Flows
From Changes in Operating Assets
and Liabilities:
Accounts Receivable (2,137,061) (5,772,364)
Inventory (411,211) (981,222)
Other Receivables 0 (2,055,192)
Prepaid Expenses and Other 251,505 316,553
Other Assets (123,503) (86,773)
Accounts Payable (2,266,700) 4,799,873
Accrued Expenses 251,977 (714,393)
Accrued Unusual Charges (1,408,304) -
Tax Refund Receivable 2,285,530 480,956
Net Cash Provided by (used in)
Operating Activities (1,394,619) 20,058
Cash Flows from Investing Activities:
Capital Expenditures (203,178) (96,702)
Net Cash (Used In) Investing Activities (203,178) (96,702)
Cash Flows from Financing Activities:
Increase in Bank Loan,
Borrowing on Credit Facility - 750,000
Principal Payments on Long-Term Debt (96,696) (812,439)
Proceeds from Exercise of Stock Options - 31,125
Net Cash Used in Financing Activities (96,696) (31,314)
Net Decrease in Cash & Cash Equivalents (1,694,493) (107,958)
Cash and Cash Equivalents, at Beginning
of Period 3,280,195 4,562,712
Cash and Cash Equivalents, at End
of Period $1,585,702 $4,454,754

Supplemental Disclosures of Cash Flow Information:
Cash Paid for Interest $432,719 $365,573
Cash Paid (Refund) for Taxes $(1,712,294) $395,880

See Notes to Condensed Consolidated Financial Statements

</TABLE>

HEALTH MANAGEMENT, INC.
And Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity
Three Months Ended July 31, 1996

<TABLE>
<CAPTION>
(Unaudited)

Common Stock Additional
$.03 Par Value Paid-in Accumulated
Shares Amount Capital Deficit

<S> <C> <C> <C> <C>
Balance, May 1, 1996 9,328,240 $279,848 $38,138,771 ($1,055,000)

Net Income for the Three
Months Ended
July 31, 1996 __________ __________ __________ 431,688

Balance, July 31, 1996 9,328,240 $279,848 $38,138,771 ($623,112)

See Notes to Condensed Consolidated Financial Statements

</TABLE>

HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The condensed consolidated financial statements include Health Management, Inc.,
a Delaware corporation (the "Company"), and its wholly-owned subsidiaries,
including Homecare Management, Inc., a New York corporation, HMI Pennsylvania,
Inc., a Delaware corporation, HMI Retail Corp., Inc., a Delaware corporation,
HMI PMA, Inc., a Delaware corporation, Health Reimbursement Corp., a Delaware
corporation, HMI Maryland, Inc., a Delaware corporation, and HMI Illinois, Inc.,
a Delaware corporation. All intercompany accounts and transactions have been
eliminated in consolidation.

The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which, in the opinion of management, are necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended April 30, 1996. The results of operations for periods for the interim
periods are not necessarily indicative of the operating results for the whole
year.

NOTE 2: CONTINGENCY

The Company and certain of its past and current directors and officers have been
named as defendants in eleven class action securities fraud lawsuits filed in
the United States District Court for the Eastern District of New York. These
lawsuits have been consolidated into one action entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). The
consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock during a period ending February 27, 1996,
the date the Company announced that it would have to restate certain of its
financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. Pursuant to
the Order of Consolidation, the Company will not be required to answer or
otherwise move in the action until thirty days after it is served with an
amended consolidated complaint, which has not yet been served on the Company.
The Company is negotiating the final terms of a Stipulation of Settlement with
plaintiffs' counsel that would resolve the litigation as regards the Company.
Such Stipulation of Settlement will be subject to court approval.

Certain of the Company's current and former officers and directors, including
Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have been
named as defendants, and the Company has been named as a nominal defendant, in a
consolidated derivative action filed in the United States District Court for the
Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and contribution
against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. The consolidated action seeks unspecified monetary damages
on behalf of the Company as well as declaratory and injunctive relief. An
amended consolidated complaint was served on the Company on August 12, 1996.
The Company's time to answer or move with respect to the amended consolidated
complaint is October 11, 1996. The Company intends to seek dismissal of the
action.

BDO Seidman, LLP has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for
the State of New York, County of New York entitled Howard Vogel, et al. v. BDO
Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. BDO Seidman was the Company's auditor at the time those
filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely.

The enforcement division of the Securities and Exchange Commission has a formal
order of investigation relating to matters arising out of the Company's public
announcement on February 27, 1996 that the Company would have to restate its
financial statements for prior periods as a result of certain accounting
irregularities and the Company is fully cooperating with this investigation and
has responded to the commission's requests for documentary evidence.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The enforcement division of the Securities Exchange Commission has a formal
order of investigation relating to matters arising out of the Company's public
announcement on February 27, 1996 that the Company would have to restate its
financial statements for prior periods as a result of certain accounting
irregularities. The Company is cooperating fully with this investigation and
has responded to the Commission's requests for documentary evidence.

The Company has been named as a defendant in an action pending in the United
States District Court for the Eastern District of New York entitled Bindley
Western Industries, Inc. v. Health Management, Inc., 96 Civ. 2330 (ADS). The
action alleges claims for breach of contract and accounts stated arising out of
a dispute regarding payment for certain goods. The action seeks damages in the
amount of $3,187,157.35 together with interest, costs and disbursements. To
date, the Company has answered the complaint, complied with its automatic
disclosure obligations, responded to plaintiff's discovery demands and has
reduced the outstanding amount payable to approximately $2.1 million as of
September 30, 1996.

On April 3, 1995, American Preferred Prescription, Inc. ("APP") filed a
complaint against the Company, Preferred Rx, Inc., Community Prescription
Services and Sean Strub in the New York Supreme Court for tortious interference
with existing and prospective contractual relationships, for lost customers and
business opportunities resulting from allegedly slanderous statements and for
allegedly false advertising and promotions. Four separate causes of action are
alleged, each for up to $10 million in damages. APP had previously filed a
similar suit in the United States Bankruptcy Court of the Eastern District of
New York, which was dismissed and the court abstained from exercising
jurisdiction. The Company has answered the complaint and counterclaimed for
libel and slander predicated upon a false press release issued by APP and added
as defendants the principals of APP. By stipulation dated January 29, 1996, the
Company discontinued its counterclaim against APP and its third-party claims
against the principals of APP. In addition, by motion dated March 12, 1996, APP
moved, in the Supreme Court of the State of New York, to amend its complaint to
add, among other things, a cause of action against the Company alleging that a
proposed plan of reorganization presented by the Company to the Bankruptcy Court
in APP's bankruptcy case was based on fraudulent financial statements and to add
certain other defendants. These defendants caused the removal of the state
court action to the Bankruptcy Court of the Eastern District of New York. By
motion dated April 12, 1996, APP requested that the Bankruptcy Court remand the
action to the State Court, which the Bankruptcy Court granted. The Company
opposed this motion, which is currently pending before the State Court.
Management believes APP's suit against it to be without merit, intends to defend
the proceeding vigorously and believes the outcome will not have a material
adverse effect on the Company's results of operations or financial position.

On or about August 4, 1995, APP commenced an action in the Supreme Court of the
State of New York, County of Nassau, against a former APP employee who is
currently employed by the Company, and Charles Hutson, Susan Hutson and Hutson
Consulting Services (collectively, the "Hutsons"). The Company is not named as
a defendant in this lawsuit. The complaint in this action alleges, among other
things, that the employee provided to the Hutsons, who formed and subsequently
discontinued a joint marketing venture with APP, confidential information which
was disclosed to competitors of APP. On September 1, 1995, the Hutsons removed
the action to the Bankruptcy Court. The employee answered the complaint on
December 27, 1995. No depositions have taken place, nor have any documents been
produced. APP moved to remand this case to the Supreme Court for the County of
Nassau. In a hearing which took place before the Bankruptcy Court on June 27,
1996, the Bankruptcy Court preliminarily ruled to grant APP's remand motion, but
provided the Hutsons a further opportunity to submit a written response to the
motion. After the Hutsons submitted a written response and a hearing was held,
the Bankruptcy Court granted APP's remand motion. The Hutsons have noticed
their appeal of this order.

The outcomes of certain lawsuits and the investigation are uncertain and the
ultimate outcomes could have a material adverse effect on the Company and the
viability of the Company going forward.

ITEM 2. CHANGE IN SECURITIES - NONE

ITEM 3. DEFAULT UPON SENIOR SECURITIES

The Company is presently in default under its Credit Agreement with
Chase Manhattan Bank, N.A., as agent and lender, for among other
things, the non-payment of a principal payment. The Company has
executed a Forbearance Agreement dated July 26, 1996 with its lenders
which provides that, subject to certain conditions, the lenders agree
not to exercise their rights and remedies under the Credit Agreement
until November 15, 1996.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NOT APPLICABLE

ITEM 5. OTHER INFORMATION - NONE

ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K

(a) Exhibits

3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of Delaware on March 25, 1986 (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-04485).

3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on
March 9, 1988 (incorporated by reference to Form 10-K for year
ended April 30, 1988).

3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on
March 31, 1992 (incorporated by reference to Registration
Statement on Form S-1, No. 33-46996).

3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on
October 27, 1994 (incorporated by reference to Form 1O-K for year
ended April 30, 1995).

3.5 Amended and Restated By-Laws of the Company (incorporated by
reference to Form 10-Q or the quarter ended January 31, 1996).

4.1 Form of 10% Convertible Subordinated Debenture (incorporated by
reference to Form 8-K dated March 4, 1991).

4.2 Specimen Form of Certificate for Common Stock (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).

4.3 Form of Representatives' Purchase Warrant (incorporated by
reference to Amendment Number 2 to Registration Statement on Form
S-1, Registration No. 33-46996).

4.4 Form of Selling Shareholders' Power of Attorney (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).

4.5 Form of Selling Shareholders' Custody Agreement (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).

10.1 Stock Purchase Agreement dated December 8, 1988 (incorporated by
reference to Form 8-K dated December 23, 1988).

10.2 Addendum dated February 1, 1989 to Stock Purchase Agreement dated
December 23, 1988 (incorporated by reference to Amendment Number
1 to Registration Statement on Form S-1, Registration No. 33-
46996).

10.3* 1989 Stock Option Plan (incorporated by reference to Registration
Statement on Form S-1, Registration No. 33-46996).

10.4 Lease dated April 20, 1990 on Company's Ronkonkoma, New York
facility between the Company and Four L Realty Co (incorporated
by reference to Registration Statement on Form S-1, Registration
No. 33-46996).

10.5 Amendment, dated March 16, 1992 to Lease dated April 20, 1990 on
Company's Headquarters between the Company and Four L Realty Co.
(incorporated by reference to Form 10-K for year ended April 30,
1992).

10.6* Company 401(k) Plan (incorporated by reference to Amendment
Number 1 to Registration Statement on Form S-1, Registration No.
33-46996).

10.7* Employment Agreement, dated as of May 1, 1996, between the
Company and W. James Nicol (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).

10.8* Employment Agreement, dated as of January 8, 1996, between the
Company and James R. Mieszala (incorporated by reference to
Annual Report on Form 10-K for the fiscal year ended April 30,
1996).

10.9* Employment Agreement, dated as of December 18, 1996, between the
Company and Paul S. Jurewicz (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).

10.10 Assets Purchase Agreement, dated as of March 27, 1994, between
the Registrant, Murray Pharmacy Too, Inc. and the Shareholders
named therein (incorporated by reference to Current Report on
Form 8-K dated April 1, 1994).

10.11 Assets Purchase Agreement, dated as of March 27, 1994, between
HMI Retail Corp., Murray Pharmacy, Inc. and the Shareholders
named therein (incorporated by reference to Annual Report on Form
10-K filed August 2, 1994).

10.12 Asset Purchase Agreement, dated as of February 21, 1995, between
Caremark Inc. and Health Management, Inc. (incorporated by
reference to Current Report on Form 8-K dated April 14, 1995).

10.13 First Amendment to Asset Purchase Agreement, dated as of March
31, 1995, between Caremark Inc. and Health Management, Inc.
(incorporated by reference to Current Report on Form 8-K dated
April 14, 1995).

10.14 Transition Agreement, dated as of March 31, 1995, between
Caremark Inc. and HMI Illinois (incorporated by reference to
Current Report on Form 8-K dated April 14, 1995).

10.15 Credit Agreement, dated as of March 31, 1995 among, Health
Management, Inc., Home Care Management, Inc., HMI Pennsylvania,
Inc., HMI Illinois, Inc., Chemical Bank, and the Guarantors and
Lenders named therein (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).

10.16 Security Agreement, dated as of March 31, 1995, among Health
Management, Inc., Home Care Management, Inc., Health
Reimbursement Corporation, HMI Retail Corp., Inc., HMI
Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank for
itself and the Lenders named therein (incorporated by reference
to Current Report on Form 8-K dated April 14, 1995).

10.17 Security Agreement and Mortgage-Trademarks and Patent, dated as
of March 31, 1994, among Health Management, Inc., Home Care
Management, Inc., Health Reimbursement Corporation, HMI Retail
Corp., Inc., HMI Pennsylvania, Inc. and HMI Maryland, Inc. and
Chemical Bank for itself and the Lenders named therein
(incorporated by reference to Current Report on Form 8-K dated
April 14, 1995).

10.18 Forbearance Agreement, dated July 26, 1996 among Health
Management, Inc., Home Care Management, Inc., HMI Illinois, Inc.,
HMI Pennsylvania, Inc., Health Reimbursement Corporation, HMI
Retail Corp., Inc., HMI PMA, Inc., HMI Maryland, Inc., Chase
Manhattan Bank, as lender and agent, and European American Bank,
as lender (incorporated by reference to Annual Report on Form 10-
K for the fiscal year ended April 30, 1996).

10.19 Agreement of Lease by and between Joseph M. Rosenthal and the
Company dated December 13, 1994 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).

10.20 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994 (incorporated by
reference to Form 10-K for the year ended April 30, 1995).

10.21 Lease by and between Irwin Hirsh and HMI Retail Corp., Inc. dated
March 27, 1994 (incorporated by reference to Form 10-K for the
year ended April 30, 1995).

10.22 Lease Agreement by and between Domas Mechanical Contractors, Inc.
and the Company dated May 18, 1995 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).

11 Statement re Computation of Per Share Earnings (incorporated by
reference to Annual Report on Form 10-K/A for the fiscal year
ended April 30, 1996).

21 Subsidiaries of the Registrant (incorporated by reference to
Annual Report on Form 10-K for the fiscal year ended April 30,
1995).

23 Consent of BDO Seidman, LLP (incorporated by reference to Annual
Report on Form 10-K/A for the fiscal year ended April 30, 1996).

27** Financial Data Schedule

* Management contract or compensatory plan or arrangement.

** Filed with this Report.

(b) Reports on Form 8-K

The Company did not file any Current Reports on Form 8-K during
the fiscal quarter ending July 31, 1996.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Lake, State of
Illinois, on the 16th day of September, 1996.

HEALTH MANAGEMENT, INC.
(Registrant)

By: /s/ W. James Nicol
W. James Nicol
(Principal Executive Officer)

By: /s/ Paul Jurewicz
Paul Jurewicz
(Principal Financial Officer)

INDEX TO EXHIBITS

NO. EXHIBIT