HEALTH MANAGEMENT INC/DE, 10-Q, 1997-09-17

HEALTH MANAGEMENT INC/DE
10-Q, 1997-09-17
DRUG STORES AND PROPRIETARY STORES

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<PAGE> 1
DRAFT OF SEPTEMBER 16, 1997 WITHOUT CHANGES MARKED

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, 1997 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 16, 1997, there were outstanding 18,294,474 shares of common
stock, $.03 par value, of the Company ("Common Stock").

<PAGE> 2

HEALTH MANAGEMENT, INC.

July 31, 1997

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Part I. FINANCIAL INFORMATION:

Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . 3-20

Part II. OTHER INFORMATION:

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 21-23

Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 24

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 24

Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . 24

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 24

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 24-28

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

</TABLE>

<PAGE> 3

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; changes or conditions affecting the Merger
Agreement and other transactions with Transworld HealthCare, Inc., a New York
corporation ("Transworld"), described below, including Transworld's willingness
not to proceed against the Company for being in default under the Credit
Agreement; 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; management and employee
turnover; general business 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

Financial Condition. On February 27, 1996, the Company announced that in the
course of an internal investigation it had discovered certain accounting
irregularities, that it intended to write down accounts receivable and inventory
assets, that the Company may have to restate its financial statements and that
it had accepted the resignation of Clifford E. Hotte as Chairman of the Board
and Chief Executive Officer. Thereafter, on April 30, 1996 the Company filed
with the Securities and Exchange Commission restated financial statements for
the fiscal year ended April 30, 1995 and for each of the fiscal quarters
contained therein, including the fiscal quarters ended July 31, 1994, October
31, 1994 and January 31, 1995; and for the fiscal

<PAGE> 4

quarters ended July 31, 1995 and October 31, 1995. 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 charges to
its balance sheet including reductions in the Company's working capital,
retained earnings and stockholders' equity.

The Company was in default under its Credit Agreement with Chase
Manhattan Bank, N.A., as agent and lender. This senior debt, the principal
amount of which aggregated approximately $28.35 million, was acquired by
Transworld on November 13, 1996, the date on which Transworld entered into the
Stock Purchase Agreement (defined below) and the Merger Agreement (defined
below) with the Company. Also, on November 13, 1996, Transworld agreed to
forbear until December 12, 1996 from exercising any remedies under such bank
debt and agreed, in its discretion, to loan the Company up to an additional $3.0
million under the Company's revolving credit facility. As of December 12, 1996,
the Forbearance Agreement was further extended until December 23, 1996 and the
availability under the Company's revolving credit facility was further increased
by up to an additional $2.0 million, subject to certain conditions and at the
discretion of Transworld. At the closing of the Stock Purchase Agreement, of the
$8,964,292 of cash proceeds, $4.7 million was applied to repay all loans of
Transworld to the Company from November 13, 1996 through January 13, 1997 and
$.1 million was applied toward interest on amounts covered under the Credit
Agreement. Since that time and until May 1997, the revolving credit facility had
been frozen; however, Transworld continued to extend the Forbearance Agreement
in short term intervals. From May through July 1997, the Company received
additional advances of $1.4 million from Transworld pursuant to the revolving
credit facility; however, the Forbearance Agreement expired on July 15, 1997,
and the Company is currently in default under its credit agreement. In addition,
Hyperion Partners II, L.P., the majority stockholder of Transworld, acquired the
obligations of the Company due to Foxmeyer Drug Co., Bindley Western, Inc. and
Caremark, Inc. which, in the aggregate, amounted to approximately $18.3 million.
Hyperion has agreed to contribute the obligations purchased from Foxmeyer Drug
Co., and Bindley Western Inc. to Transworld in exchange for stock of Transworld.

There have been no improvements in the lines of credit available to the
Company as a result of entering into and consummating the Stock Purchase
Agreement and entering into the Merger Agreement.

The Company continues to experience severe financial difficulties. If
the Company is not stabilized through the Merger transaction or an alternative
transaction is not consummated in the near future or if Transworld or Hyperion
does not advance additional funds to the Company, the Company may file for
protection under the Federal bankruptcy laws.

Transactions with Transworld HealthCare, Inc. On November 13, 1996, Transworld
acquired the bank debt of the Company that was outstanding under the Credit
Agreement, dated March 31, 1995 (the "Credit Agreement"), among the Company,
Chase Manhattan Bank, as agent, and the guarantors and lenders named therein,
the principal amount of which aggregated $28.35 million. The Company was in
default under various covenants contained in the Credit Agreement and Transworld
agreed to forebear until December 12, 1996 from exercising any remedies under
the Credit Agreement and agreed, in its discretion, to loan the Company up to an
additional $3.0 million under the Company's revolving credit facility. The
forbearance agreement was subsequently extended in short term intervals until
July 15, 1997 and the

<PAGE> 5

Company's revolving credit facility was increased by up to an additional $2.0
million on December 23, 1996.

Also on November 13, 1996, the Company entered into a Stock Purchase
Agreement with Transworld, pursuant to which Transworld agreed to acquire
8,964,292 newly issued shares of Common Stock, representing 49% of the
outstanding Common Stock, as well as an option to purchase an additional 746,713
of the Common Stock at $1.00 per share. The closing of this transaction occurred
on January 13, 1997. The consideration for the Shares included: (i) the
execution by Transworld of the Merger Agreement (defined below), (ii) the
purchase by Transworld of the rights of the Company's senior lenders under the
Credit Agreement, (iii) the extension by Transworld of the expiration date under
the Forbearance Agreement, (iv) the extension by Transworld of additional
amounts under the revolving credit facility, subject to certain conditions and
at Transworld's discretion, (v) the cancellation by Transworld of rights granted
to the lenders to warrants of the Company, and (vi) $1.00 per share of Common
Stock. Of the $1.00 per share consideration, which aggregates approximately $8.9
million, approximately $4.6 million was applied toward repayment of amounts
loaned to the Company under the revolving credit facility subsequent to November
13, 1996 through January 13, 1997, and approximately $.1 million was applied
towards payment of outstanding interest under the Credit Agreement. If
Transworld exercises its option, it will own 51% of the outstanding common stock
of the Company.

On November 13, 1996, the Company, Transworld and IMH Acquisition
Corp., a wholly owned Delaware subsidiary of Transworld ("IMH"), also entered
into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
IMH would merge (the "Merger") into the Company and each stockholder of the
Company (other than Transworld and its affiliates) would receive cash
consideration equal to $2.00 per share. On January 13, 1997, the Merger
Agreement was amended to provide for, among other things, a reduced cash
consideration of $1.50 per share in light of certain material adverse changes to
the business and financial condition of the Company. On March 17, 1997, the
Company announced that it planned to restate its first and second quarter fiscal
1997 results and take a charge of approximately $13 million in the third quarter
of fiscal 1997. In light of these events, the cash consideration was
renegotiated to $0.30 per share (the "Merger Consideration"). If the Merger is
consummated, the Company will become the wholly owned subsidiary of Transworld.
The Merger Agreement is subject to certain conditions, including the consent of
Transworld's lenders. The Merger Agreement was approved and adopted by the
stockholders of the Company on July 11, 1997.

On August 1, 1997, Transworld informed the Company that Transworld's
lenders had not yet consented to the Merger and Transworld would not be able to
consummate the Merger in the near future. Transworld and the Company began to
explore alternative transactions, including those involving bankruptcy filings.
On August 14, 1997, Transworld announced that it had entered into an agreement
with Counsel Corporation, a Canadian corporation ("Counsel"), relating to the
sale of substantially all of the business and assets of the Company. Pursuant to
the agreement, Counsel will purchase the assets of the Company for $40 million,
subject to certain conditions. While the Company is not a party to the agreement
between Transworld and Counsel, the Company has agreed to allow Counsel to
conduct due diligence and has agreed to refrain from discussing transactions
with other potential buyers until September 30, 1997 or such earlier date after
September 3, 1997 as instructed by Transworld

5
<PAGE> 6

Transworld has informed the Company that it intends to consummate the Merger
subject to certain conditions, including bank approval, immediately prior to the
sale of the assets to Counsel. Such sale is currently scheduled for September
30, 1997

Significant Litigation. The Company has been named as a defendant in a
consolidated stockholder class action lawsuit and as a nominal defendant in two
derivative suits. With respect to the consolidated stockholder class action
lawsuit, the Company entered into a Stipulation of Partial Settlement with the
plaintiffs' counsel and on September 18, 1996 such Stipulation of Partial
Settlement received preliminary court approval (the "Original Settlement"). The
Original Settlement provided for, among other things, the payment by the Company
of $2 million in cash, the issuance of 2,200,000 shares of Common Stock and
warrants to purchase 2,200,000 shares of Common Stock. On December 19, 1996 the
Company entered into an Amended Stipulation of Partial Settlement providing for,
among other things, a $7.2 million cash payment. Preliminary approval of the
Amended Stipulation of Partial Settlement was granted by the U.S. District Court
for the Eastern District of New York, on December 20, 1996. As a condition to
Transworld's obligation to consummate the Merger, the Amended Stipulation of
Partial Settlement was further amended on April 23, 1997, to provide for a
reduced cash settlement in the amount of $4.55 million, and court approval of
such amended settlement was received on June 9, 1997. The Restated Stipulation
of Partial Settlement provides for the settlement of the lawsuit as against the
Company of $4.55 million in cash, of which $3.2 million was paid at the time the
Restated Stipulation of Partial Settlement became final. The remaining $1.35
million is to be paid at the effective time of the Merger. The Company is in the
process of negotiating with its directors and officers' liability insurance
carrier with respect to coverage for damages in connection with the stockholder
class action lawsuit and any payments received from such carrier may reduce the
Company's liability with respect to such settlement. After the Company announced
that it would have to restate its financial statements for the first and second
quarters of fiscal 1997, the Company and certain executive officers were named
as defendants in a purported stockholder class action lawsuit.

Management and Employee Turnover. Effective May 1, 1996, W. James
Nicol, an experienced health care executive, was named Chief Executive Officer
and President 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 Home Care 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. Mr. Jurewicz
resigned, effective January 10, 1997, to assume a new position. Mr. Nicol
assumed the additional duties of the Chief Financial Officer effective January
10, 1997 and in March 1997 the Company retained outside financial consultants
to also provide support in the financial area. In July 1997, Mr. Dennis J.
Conley joined the Company to provide support in the financial area; in August,
he was appointed Vice President of Finance. Mr. Mieszala assumed the additional
duties of President and Chief Executive Officer from Mr. Nicol effective August
11, 1997. Mr. Nicol remains on the Board of Directors.

6
<PAGE> 7

The Company has experienced substantial turnover of its management
group and, as a result of financial uncertainty surrounding the Company, its
employees over the past twenty months and several of the Company's executive
officers have been in their current position for only a limited period of time.
The Company's future depends, in large part, upon its ability to obtain, retain
and replace its staff . Also, the Company's ability to successfully conclude the
Transworld transaction may depend on its ability to retain its key personnel to
manage through the transition. There can be no assurances that the Company will
be successful in its efforts to retain such personnel.

Introduction of New Antipsychotic Drugs; Blood Monitoring. In October, 1996,
Olanzapine, a new antipsychotic agent for the treatment of schizophrenia, was
introduced into the market. The Company also expects several additional
antipsychotic drugs to be introduced in the next year, based upon the recent
history of such new products having been introduced into the market and the
present pipeline of potential new products in various stages of the Food and
Drug Administration review process. The Company anticipates providing these new
drugs to schizophrenic patients as it broadens its LifecareTM Program.
Management believes that the introduction of Olanzapine has been a factor in the
recent decline of the Company's Clozapine customer base (approximately 17% since
October 1996 including an approximately 9% decline attributable to the closure
of three offices) as physicians preferentially prescribe Olanzapine for
treatment of schizophrenia. Because Olanzapine does not require weekly blood
monitoring, and therefore is less costly than Clozapine, and because the
relative efficacy of Olanzapine is still uncertain, the Company cannot predict
the ultimate effect on its customer base and, in turn, its financial condition
from the introduction of Olanzapine. The Company also cannot predict the effect
on its financial condition of the introduction of other antipsychotic drugs.

In addition, the Company's Clozaril Patient Management Business
("CPMB") contains multiple components including weekly blood draws to test for
a side effect associated with Clozapine. On July 14, 1997, an advisory
committee of the FDA recommended potential changes to reduce the need for and
frequency of the blood test monitoring. At this time, there is no certainty
regarding whether the FDA will accept the recommendations of the committee,
decide not to make any changes for the time being, or make some other changes
in the frequency of or requirement for monitoring. The Company derives a
significant portion of its gross margin from the sale of Clozapine from the
fees related to the weekly monitoring. Any change in the requirement for or
frequency of monitoring could materially effect the Company's results of
operations and cash flows. After consideration of the negative impact on cash
flows from the reduction of blood monitoring revenues, introduction of
competitive products and other factors, the carrying value of the goodwill
associated with the original purchase of the Clozapine business was written off
during the fourth quarter of fiscal year ending April 30, 1997.

RESULTS OF OPERATIONS

Three months ended July 31, 1997 compared to July 31, 1996

The Company's revenues were $38.7 million for the quarter ended July 31, 1997, a
decrease of $1.9 million or 4.6% from the revenues of $40.5 million for the
three months ended July 31, 1996. The decrease in revenues is due to (a) the
effects of a general downward pressure on reimbursement levels exacerbated by
the shift of the Company's reimbursement sources to either Medicare, Medicaid or
drug cards, all of which tend to reimburse at lower rates than commercial

7
<PAGE> 8

indemnity payors, (b) the continued decline in patients and related revenues
from the Clozaril(R) Patient Monitoring Business and (c) the closure of six
offices, two of which had a high percentage of sales of Clozaril.

Gross profit margins were 19.3% for the quarter ended July 31, 1997, as compared
to 21.4% for the quarter ended July 31, 1996. The decrease in the gross profit
rate represents an overall reduction in reimbursement rates from third party
payors, as described above, and the closure of six offices, including two
which had a high percentage of sales of Clozaril, a product line with the
Company's highest gross margin.

Operating expenses for the quarter ended July 31, 1997 were $9.9 million, an
increase of $0.8 million or 9.1% over the quarter ended July 31, 1996. This
increase was principally attributable to an increase in the provision for
doubtful accounts due to higher estimated loss rates being applied to the
various aging categories of receivables, especially in the receivables being
collected by the Company's Long Island, New York, office where historical
collection efforts were hampered by inadequate staffing partially offset by a
decrease in general and administrative expenses achieved through the closure of
six offices, tightened cost containment policies and a small decrease in legal
and accounting expenses and, following the completion of a computer conversion
during the later half of the quarter, a decrease in consulting expenses.

Loss from operations for the quarter ended July 1997 was ($2.5) million, an
increase of $2.0 million from the quarter ended July 31, 1996. The increase in
the loss from operations is a result of the decrease in revenues and gross
profit rate and the increase in operating expenses discussed above.

Interest expense for the quarter ended July 31, 1997 was $.9 million, an
increase of $0.1 million, or 17.7%, over the quarter ended July 31, 1996. This
increase is attributable to increased borrowings under the revolving credit
facility partially offset by reduced interest expense related to the Company's
term loan due to principal reductions.

Loss before income taxes for the quarter ended July 31, 1997 was ($3.3) million,
an increase of $2.2 million from the quarter ended July 31, 1996. The increase
is attributable to the reduced revenues and gross profit margins and increased
operating and interest expenses.

Income taxes for both periods are less than the statuory rate since the
Company, in accordance with generally accepted accounting principles, did not
record the benefit, if any, of the potential net operating loss carryforward
because of the uncertainty of its future realization. The Company did incur
state income taxes during the quarter ended July 31, 1996 in certain states in
which it does business.

Net loss for the quarter ended July 31, 1997 was ($3.3) million, an increase of
$2.1 million from the quarter ended July 31, 1996 for the reasons explained
above.

Primary and fully diluted loss per common share for the quarter ended
July 31, 1997 were both ($0.18) compared to ($0.14) for the quarter ended July
31, 1996. The weighted average number of shares outstanding used in the
calculation of primary and fully diluted earnings per share was 18,294,474 for
the quarter ended July 31, 1997 and 9,328,240 and 9,333,528, respectively, for
the quarter ended July 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

The working capital deficit at July 31, 1997 was ($25.7) million, a decrease of
$3.4 million from the ($22.3) million at April 30, 1997. Current assets
decreased $2.3 million due to a decrease in net accounts receivable of $1.3

8
<PAGE> 9

million, a decrease in inventory of $0.7 million and a decrease in prepaid
expenses of $0.3 million.

Current liabilities increased $1.1 million principally due to a decrease in
accounts payable of $0.2 million, a decrease in accrued unusual charges and
settlement costs of $.1 million, and an increase in amounts due to affiliates of
$1.4 million.

The Company continues to experience monthly operating losses and
negative cash flows. Accordingly, the Company is not generating sufficient
cash flows from current revenues to meet its expenses. While the Company is
continuing to experience difficulties in collecting accounts receivable,
management anticipates that the Company may be able to make sufficient
collections, particularly from older accounts receivable, to meet its immediate
cash flow needs. There can be no assurance, however, that the Company will be
able to collect accounts receivable in a timely manner.

The Company is in default under various covenants contained in the
Credit Agreement and, since July 1997, has not made payments of interest
thereunder. The Forbearance Agreement between Transworld and The Company has not
been extended past July 15, 1997, but, as of the date hereof, Transworld has not
pursued any of its remedies under the Credit Agreement. During the period May
through July 1997, the Company received additional net advances of $1.4 million
from Transworld under its revolving credit facility. In September 1997, the
Company received a tax refund of approximately $2.9 million, which refund was
applied to reduce the Company's indebtedness to Transworld.

In order to meet its ongoing cash flow requirements and continue its
operations, the Company may be dependent upon further cash infusions from
Transworld. In light of Transworld's agreement with Counsel, Transworld's
principal stockholder, Hyperion, has indicated a willingness to provide the
Company with additional liquidity. However, neither Transworld nor Hyperion is
obligated to provide the Company with additional funds.

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. 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 Merger or an alternative transaction is not consummated in the
near future or if Transworld or Hyperion does not advance additional funds to
the Company, the Company may file for protection under the Federal bankruptcy
laws.

9
<PAGE> 10

HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES

Index to Condensed Consolidated Financial Statements

<TABLE>
<CAPTION>
Page No.
<S> <C>
Balance Sheets as of July 31, 1997 (Unaudited)
and April 30, 1997 (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . 11

Statements of Operations for the Three Months Ended
July 31, 1997 and July 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . 13

Statements of Cash Flow for the Three Months Ended July 31, 1997 and July 31, 1996
(Unaudited). . . . .. . .. . . . . . . . . . . . . . .. . . . . . . .. .. . . 14

Statement of Stockholders' Equity (Deficit) for the Three Months
Ended July 31, 1997 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 15

Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . 16-20
</TABLE>

10
<PAGE> 11

HEALTH MANAGEMENT, INC.
And Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
($ in 000's)

<TABLE>
<CAPTION>
July 31, 1997 April 30, 1997
(Unaudited) (Audited)

<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,162 $ 1,134
Accounts Receivable, Less Allowance for
Doubtful Accounts of approximately
$18.6 million and $16.0 million,
respectively 25,536 26,898
Inventories 6,417 7,108
Tax Refund Receivable 2,861 2,861
Prepaid expenses and other 147 442
------- -------
Total Current Assets 36,123 38,443

IMPROVEMENTS and EQUIPMENT, Less
Accumulated Depreciation and
Amortization 2,353 2,327

OTHER 237 219
------- -------
$38,713 $40,989
======= =======

</TABLE>

See Notes to Condensed Consolidated Financial Statements

11
<PAGE> 12

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

($ in 000's)
<TABLE>
<CAPTION>

July 31, 1997 April 30, 1997
(Unaudited) (Audited)

<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable:
Trade $ 5,609 $ 5,816
Due to Hyperion 15,330 15,330
------- -------
Total Accounts Payable 20,939 21,146
Accrued Unusual Charges and
Settlement Costs 1,400 1,453
Accrued Expenses 4,060 4,043
Current Maturities of
Debt And Other Obligations:
Due to Transworld 31,568 30,168
Due to Hyperion 3,000 3,000
Other 896 890
------- -------
TOTAL CURRENT LIABILITIES 61,863 60,700

Debt and Other Obligations,
Less Current Maturities 835 936
------- -------
TOTAL LIABILITIES 62,698 61,636

COMMITMENTS and CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock-$.01 Par Value:
Shares Authorized - 1,000,000
Issued and Outstanding, none
Common Stock-$.03 Par Value:
Shares Authorized - 39,000,000
Issued and Outstanding-18,294,474 549 549
Additional Paid-in Capital 45,958 45,958
Accumulated Deficit (70,492) (67,154)
------- -------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (23,985) (20,647)
------- -------
$38,713 $40,989
======= =======
</TABLE>

See Notes to Condensed Consolidated Financial Statements

12
<PAGE> 13

HEALTH MANAGEMENT, INC.

And Subsidiaries

Condensed Consolidated Statements of Operations
(Unaudited)
($ in 000's, except per share)

Three Months Ended July 31

1997 1996

<S> <C> <C>
Revenues $38,652 $40,523
Cost of Sales 31,202 31,862
------- -------
Gross Profit 7,450 8,661

Operating Expenses:

Selling 1,268 1,233
General and Administrative 5,857 6,220
Provision for Doubtful Accounts 2,793 1,635
------- -------
9,918 9,088
------- -------

Loss from Operations (2,468) (427)

Interest Expense 870 739
------- -------

Loss Before Income Taxes (3,338) (1,166)

Income Taxes -- 122
------- -------

Net Loss $(3,338) $(1,288)
======= =======

Loss Per Common Share:
Primary ($ 0.18) ($ 0.14)
Fully Diluted ($ 0.18) ($ 0.14)

Weighted Average Shares Outstanding
Primary 18,294,474 9,328,240
Fully Diluted 18,294,474 9,333,528

</TABLE>

See Notes to Condensed Consolidated Financial Statements

13
<PAGE> 14

HEALTH MANAGEMENT, INC.
And Subsidiaries

Condensed Consolidated Statement of Cash Flow
For The Three Months Ended July 31
($ in 000's)

<TABLE>
<CAPTION>
(Unaudited)
1997 1996
<S> <C> <C>

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss $(3,338) $(1,288)
Adjustments to Reconcile Net
Loss to Net Cash Used In
Operating Activities:
Depreciation & Amortization 225 646
Provision for Doubtful Accounts 2,793 1,635
Deferred Taxes -- (550)
Increase (Decrease) in Cash Flows
From Changes in Operating Assets
and Liabilities:
Accounts Receivable (1,431) (2,138)
Inventories 691 (411)
Prepaid Expenses and Other 295 252
Other Assets (18) (124)
Accounts Payable (207) (416)
Accrued Expenses 17 252
Accrued Unusual Charges and
Settlement Costs (53) (1,408)
Tax Refund Receivable -- 2,155
------- -------
Net Cash Used In
Operating Activities (1,026) (1,395)

Cash Flows from Investing Activities:
Capital Expenditures (251) (203)
------- -------
Net Cash Used In Investing Activities (251) (203)
Cash Flows from Financing Activities:
Increase in Revolving Credit Facility 1,400 --
Principal Payments on Debt
and Other Obligations (95) (96)
------- -------
Net Cash Provided By (Used In)
Financing Activities 1,305 (96)

Net Increase (Decrease) in Cash & Cash
Equivalents 28 (1,694)
Cash and Cash Equivalents, at Beginning
of Period 1,134 3,280
------- -------
Cash and Cash Equivalents, at End
of Period $ 1,162 $ 1,586
======= =======

Supplemental Disclosures of Cash Flow Information:
Cash Paid for Interest $ 523 $ 433
Cash Paid <Refund> for Taxes $ 6 $(1,712)

</TABLE>

See Notes to Condensed Consolidated Financial Statements

14
<PAGE> 15

HEALTH MANAGEMENT, INC.
And Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Three Months Ended July 31, 1997

(Unaudited)
$ in 000's
<TABLE>
<CAPTION>

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

<S> <C> <C> <C> <C> <C>
Balance May 1, 1997 18,294,474 $549 $45,958 ($67,154) ($20,647)

Net Loss for the
Three Months Ended
July 31, 1997 -- -- -- ( 3,338) ( 3,338)
---------- ---- ------- -------- --------
Balance July 31, 1997 18,294,474 $549 $45,958 ($70,492) ($23,985)
========== ==== ======= ======== ========

</TABLE>

See Notes to Condensed Consolidated Financial Statements

15
<PAGE> 16

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. All
intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company's ability to
continue as a going concern depends on (a) the continuing financial and
operating support from Transworld and the consummation of the merger with
Transworld or, should the merger not occur, alternative means of financial and
operating support; (b) continuing satisfactory relations with its suppliers; and
(c) the satisfactory resolution of the Company's litigation (Note 2).
Accordingly, there continues to be substantial doubt about the Company's ability
to continue as a going concern.

If the Merger or an alternative transaction is not consummated or
Transworld or Hyperion does not advance additional funds to the Company, the
Company may seek protection under Federal bankruptcy laws. Should the Company
seek bankruptcy, it is likely the carrying value of assets will be adversely
affected. The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

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 consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended April 30, 1997. The results of operations for
periods for the interim periods are not necessarily indicative of the operating
results for the whole year.

NOTE 2: CONTINGENCIES

16
<PAGE> 17

February 27, 1996, the date the Company announced that it would have to restate
certain of its financial statements. The consolidated action sought unspecified
monetary damages reflecting the decline in the trading price of the shares of
Common Stock that allegedly resulted from the Company's February 1996
announcements. The Company reached a settlement of the consolidated action which
received court approval on June 9, 1997. The settlement provided for a cash
payment of $4.55 million of which $3.2 million was paid at the time the court's
approval of the settlement became final and the remaining $1.35 million is to be
paid at the effective time of the Merger. The Company has been in the process of
negotiating with its directors and officers liability insurance carrier with
respect to coverage for damages in connection with the stockholder class action
lawsuit and certain payments received from such carrier may reduce the Company's
liability with respect to such settlement.

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 on March 15, 1996 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 filed a motion to dismiss the amended consolidated complaint on June
2, 1997. The Company's motion argued, among other things, that plaintiffs failed
to serve a presuit demand upon the Company's Board of Directors and that
plaintiffs will lose standing upon the consummation of the Merger. A hearing on
the Company's motion is currently scheduled to take place on October 17, 1997.
In December 1996, the Company and the plaintiffs' counsel tentatively agreed on
a cash settlement of $175,000; however, the parties subsequently were unable to
agree on the other terms of the settlement and currently there is no settlement
offer pending.

BDO Seidman has been named as a defendant, and the Company has been
named as a nominal defendant, in a derivative lawsuit filed on June 12, 1996 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 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.

17
<PAGE> 18

under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder arising out of misrepresentations and omissions by
the Company in connection with certain of its securities filings and press
releases. The action purports to represent a class of persons who purchased
shares of Common Stock between April 26, 1996 and March 17, 1997 inclusive, the
date the Company announced that it would have to restate certain of its
financial statements and that it was renegotiating its deal with Transworld.
The action seeks unspecified compensatory damages. The Company intends to
vigorously defend itself in this action.

Under the Company's Certificate of Incorporation and Bylaws, certain
officers and directors may be entitled to indemnification, or advancement of
expenses for legal fees in connection with the above lawsuits. The Company may
be required to make payments in respect thereof in the future. The Company and
Transworld had been named as defendants in a lawsuit filed on March 11, 1997 in
the Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA No.
15609NC. The plaintiff in that case sought reimbursement and advancement of
legal fees and expenses and on April 29, 1997, that suit was settled for
$275,000.

The enforcement division of the Securities and Exchange Commission has
issued 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 fully cooperating with this
investigation and has responded to the requests of the Securities and Exchange
Commission for documentary evidence.

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. 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 financial statements of the Company
that were allegedly fraudulent. On September 17, 1996 the Court granted APP's
motion to amend its complaint to add a fifth cause of action. The Company
noticed an appeal of this order in November 1996 and has filed its initial brief
on the matter. 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.

18
<PAGE> 19

subsequently discontinued a joint marketing venture with APP, confidential
information which was disclosed to competitors of APP, including the Company.
The action was removed to the United States Bankruptcy Court of the Eastern
District of New York and subsequently remanded to the Supreme Court of the State
of New York, Nassau County. The Hutsons have noticed their appeal of this order
and have moved to dismiss the action against them, asserting that they are not
subject to the jurisdiction of the New York State court. The Company is
presently paying certain expenses of its employee in connection with this
litigation.

On May 22, 1997, a Writ of Summons was sent to the Company in respect
of action brought in the Superior Court at Nashua, New Hampshire entitled Linley
v. Health Management, Inc. Mr. Linley alleges, among other things, breach of
contract, estoppel, negligent misrepresentation, fraud and breach of fiduciary
duties and obligation of good faith and fair dealing in connection with an
alleged joint venture between plaintiff and the Company. Management believes
this action to be without merit and not material to the Company's results of
operations or financial condition.

On June 4, 1997, the Company commenced an action in the United States
District Court for the Eastern District of New York entitled Health Management,
Inc. v. Clifford E. Hotte, Robert Clifton, Robert Heiser, Christopher DeMarzo,
Crystal Collard, Clementine Ceglia, and Virginia Belloise. The complaint alleges
that Messrs. Hotte, Clifton, Heiser, and DeMarzo and Ms. Collard and Ceglia
breached their respective employment agreements with HMI by competing against
the Company, soliciting its customers and employees, and/or disclosing or using
confidential information. The complaint also alleges that Clifford E. Hotte and
Virginia Belloise breached their fiduciary duties while serving as members of
the Company's Board of Directors. Finally, the complaint alleges that
Pharmaceutical Care Services, Inc. interfered with the contractual relations
between the Company and the above-referenced individuals. A hearing on the
Company's application for a preliminary injunction was held on June 12, 1997,
and the Magistrate issued his Report and Recommendations on July 10, 1997 that
the preliminary injunction be granted against defendants Hotte, Clifton and
DeMarzo but not against the other defendants. Hotte, Clifton and DeMarzo filed
their objections to the Magistrate's Report and Recommendation on July 21 and
24, 1997, and the Company filed its opposition to the defendants' objections on
July 29, 1997.

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

NOTE 3: SUBSEQUENT EVENTS

On August 1, 1997, Transworld indicated that it was unable to obtain
the consent of its bank to conclude the merger with the Company. Neither
Transworld or the Company has terminated the merger agreement; however, the
merger agreement is subject to termination by either party for any reason.
Transworld and the Company are discussing potential alternative transactions. On
August 14, 1997, Transworld announced that it had entered into an agreement with
Counsel relating to the sale of substantially all of the business and assets of
the Company. Pursuant to the agreement, Counsel will purchase the assets of the
Company for $40 million, subject to certain conditions. While the Company is not
a party to the agreement between Transworld and Counsel

19
<PAGE> 20

the Company has agreed to allow Counsel to conduct due diligence and has agreed
to refrain from discussing transactions with other potential buyers until
September 30, 1997 or such earlier date after September 3, 1997 as instructed
by Transworld. Transworld has notified the Company that it intends to
consummate the Merger subject to certain conditions, including bank approval,
immediately prior to the sale of the assets to Counsel. Such sale is currently
scheduled for September 30, 1997.

20
<PAGE> 21

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and certain of its former directors and officers and its current
outside auditors, BDO Seidman, have been named as defendants in a consolidated
securities fraud lawsuit filed on February 29, 1996 in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). This
consolidated action alleged 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 action represented a class of persons who purchased
shares of Common Stock between August 25, 1994 and February 27, 1996, the date
the Company announced that it would have to restate certain of its financial
statements. The consolidated action sought unspecified monetary damages
reflecting the decline in the trading price of the shares of Common Stock that
allegedly resulted from the Company's February 1996 announcements. The Company
reached a settlement of the consolidated action which received court approval on
June 9, 1997. The settlement provided for a cash payment of $4.55 million of
which $3.2 million was paid at the time the court's approval of the settlement
became final and the remaining $1.35 million is to be paid at the effective time
of the Merger. The Company has been in the process of negotiating with its
directors and officers liability insurance carrier with respect to coverage for
damages in connection with the stockholder class action lawsuit and certain
payments received from such carrier may reduce the Company's liability with
respect to such settlement.

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 on March 15, 1996 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 filed a motion to dismiss the amended consolidated complaint on
June 2, 1997. The Company's motion argued, among other things, that plaintiffs
failed to serve a presuit demand upon the Company's Board of Directors and that
plaintiffs will lose standing upon the consummation of the Merger. A hearing on
the Company's motion is currently scheduled to take place on October 17, 1997.
In December 1996, the Company and the plaintiffs' counsel tentatively agreed on
a cash settlement of $175,000; however, the parties subsequently were unable to
agree on the other terms of the settlement and currently there is no settlement
offer pending.

21
<PAGE> 22

Seidman arising out of alleged misrepresentations and omissions contained in
certain of the Company's 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 Company, BDO Seidman, LLP, Transworld and Messrs. Nicol, Jurewicz and
Mieszala have been named as defendants in an amended class action lawsuit
served on September 12, 1997 and pending in the United States District Court
for the Eastern District of New York entitled Dennis Baker, et al. v. Health
Management, Inc., BDO Seidman, LLP, Transworld Healthcare, Inc., W. James
Nicol, Paul S. Jurewicz and James Mieszala, 97 Civ. 1646 (formerly entitled
Nicolas Volonnino, et. al. v. HMI et. al.). This action alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder arising out of misrepresentations and omissions by the
Company in connection with certain of its securities filings and press
releases. The action purports to represent a class of persons who purchased
shares of Common Stock between April 26, 1996 and March 17, 1997, inclusive,
the date the Company announced that it would have to restate certain of its
financial statements and that it was renegotiating its deal with Transworld.
The action seeks unspecified compensatory damages. The Company intends to
vigorously defend itself in this action.

Under the Company's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses
for legal fees in connection with the above lawsuits. The Company may be
required to make payments in respect thereof in the future. The Company and
Transworld had been named as defendants in a lawsuit filed on March 11, 1997 in
the Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA No.
15609NC. The plaintiff in that case sought reimbursement and advancement of
legal fees and expenses and on April 29, 1997, that suit was settled for
$275,000.

The enforcement division of the Securities and Exchange Commission has issued 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 fully cooperating with this investigation and
has responded to the requests of the Securities and Exchange Commission for
documentary evidence.

22
<PAGE> 23

September 17, 1996 the Court granted APP's motion to amend its complaint to add
a fifth cause of action. The Company noticed an appeal of this order in November
1996 and has filed its initial brief on the matter. 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, including the Company. The action was
removed to the United States Bankruptcy Court of the Eastern District of New
York and subsequently remanded to the Supreme Court of the State of New York,
Nassau County. The Hutsons have noticed their appeal of this order and have
moved to dismiss the action against them, asserting that they are not subject
to the jurisdiction of the New York State court. The Company is presently
paying certain expenses of its employee in connection with this litigation.

On May 22, 1997, a Writ of Summons was sent to the Company in respect of action
brought in the Superior Court at Nashua, New Hampshire entitled Linley v.
Health Management, Inc. Mr. Linley alleges, among other things, breach of
contract, estoppel, negligent misrepresentation, fraud and breach of fiduciary
duties and obligation of good faith and fair dealing in connection with an
alleged joint venture between plaintiff and the Company. Management believes
this action to be without merit and not material to the Company's results of
operations or financial condition.

On June 4, 1997, the Company commenced an action in the United States District
Court for the Eastern District of New York entitled Health Management, Inc. v.
Clifford E. Hotte, Robert Clifton, Robert Heiser, Christopher DeMarzo, Crystal
Collard, Clementine Ceglia, and Virginia Belloise. The complaint alleges that
Messrs. Hotte, Clifton, Heiser, and DeMarzo and Ms. Collard and Ceglia breached
their respective employment agreements with HMI by competing against the
Company, soliciting its customers and employees, and/or disclosing or using
confidential information. The complaint also alleges that Clifford E. Hotte and
Virginia Belloise breached their fiduciary duties while serving as members of
the Company's Board of Directors. Finally, the complaint alleges that
Pharmaceutical Care Services, Inc. interfered with the contractual relations
between the Company and the above-referenced individuals. A hearing on the
Company's application for a preliminary injunction was held on June 12, 1997,
and the Magistrate issued his Report and Recommendations on July 10, 1997 that
the preliminary injunction be granted against defendants Hotte, Clifton and
DeMarzo but not against the other defendants. Hotte, Clifton and DeMarzo filed
their objections to the Magistrate's Report and Recommendation on July 21 and
24, 1997, and the Company filed its opposition to the defendants' objections on
July 29, 1997.

The outcomes of certain of the foregoing lawsuits and the investigation are
uncertain and could have a material adverse effect on the Company.

23
<PAGE> 24

ITEM 2. CHANGE IN SECURITIES - NONE

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Company is presently in default in its Credit Agreement with Transworld for
non-payment of principal in the aggregate amount of $31.6 million. The
Forbearance Agreement expired on July 15, 1997. Although the agreement has not
been extended, Transworld has not elected as of this date to exercise its
rights pursuant to the Forbearance Agreement.

The Company is also in default under a $3 million subordinated note payable due
Hyperion.

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

On July 11, 1997, the Company convened a special meeting of its stockholders to
vote on the approval and adoption of the Merger Agreement with Transworld. The
Merger Agreement was approved by a vote of 10,504,202 shares for and 757,248
shares against, with 51,278 share abstentions and no broker non-votes.

ITEM 5. OTHER INFORMATION - NONE

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
<TABLE>
<S> <C>
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 10-K for
year ended April 30, 1995).

3.5 Certificate of Amendment of Certificate of Incorporation of the Company, as filed with the
Secretary of State of Delaware on November 8, 1996 (incorporated by reference to Form 10-Q for
the quarter ended January 31, 1997).

3.6 Amended and Restated By-Laws of the Company (incorporated by reference to Form 10-Q for 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).
</TABLE>

24
<PAGE> 25

<TABLE>
<S> <C>
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).

10.3* 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* Letter Agreement dated November 13, 1996, between W. James Nicol and the Company and guaranteed
by Transworld Home HealthCare, Inc. (incorporated by reference to Form 10-Q for the quarter
ended January 31, 1997).

10.9* Severance Agreement dated August 10, 1997, between W. James Nicol and the Company (incorporated by
reference to Form 10-K for the year ended April 30, 1997).

10.10* Employment Agreement, dated as of September 9, 1996, between the Company and James R. Mieszala
(incorporated by reference to Current Report on Form 8-K dated September 16, 1996).

10.11* Letter Agreement dated November 13, 1996, between James R. Mieszala and the Company and
guaranteed by Transworld Home HealthCare, Inc. (incorporated by reference to Form 10-Q for the
quarter ended January 31, 1997).

</TABLE>

25
<PAGE> 26
<TABLE>
<S> <C>
10.12* Employment Agreement, dated as of September 9, 1996, between the Company and Paul S. Jurewicz
(incorporated by reference to Current Report on Form 8-K dated September 16, 1996).

10.13* Letter Agreement dated November 13, 1996, between Paul S. Jurewicz and the Company and
guaranteed by Transworld Home HealthCare, Inc. (incorporated by reference to Form 10-Q for the
quarter ended January 31, 1997).

10.14 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).

10.15 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).

10.16 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).

10.17 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).

10.18 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).

10.19 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).

10.20 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).

10.21 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).
</TABLE>

26
<PAGE> 27
<TABLE>
<S> <C>
10.22 Forbearance Agreement, dated as of November 13, 1996, between the Company and Transworld Home
HealthCare, Inc. (incorporated by reference to the Form 8-K dated November 13, 1996).

10.23 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).

10.24 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).

10.25 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).

10.26 Stipulation of Partial Settlement dated September 16, 1996, between the Company and the Representative
Plaintiffs (incorporated by reference to Form 8-K dated September, 1996).

10.27 Amended Stipulation of Partial Settlement dated December 19, 1996, between the Company and the
Representative Plaintiffs (incorporated by reference to Form 8-K, dated December 23, 1996).

10.28 Agreement and Plan of Merger, dated November 13, 1996, as amended, among IMH Acquisition Corp.,
Transworld Home HealthCare, Inc. and the Company (incorporated by reference to Annex I to the definitive
Proxy Statement on Schedule 14A dated June 16, 1997).

10.29 Stock Purchase Agreement dated as of November 13, 1996, between the Company and Transworld Home
HealthCare, Inc. (incorporated by reference to Form 8-K dated November 13, 1996).

10.30* 1996 Non-Employee Director Stock Option Plan (incorporated by reference to Schedule 14A dated October 9, 1996).

10.31* 1996 Employee Stock Option Plan (incorporated by reference to Schedule 14A dated October 9, 1996)

10.32* 1997 Employee Stock Purchase Plan (incorporated by reference to Schedule 14A dated October 9, 1996)

10.33 Restated Stipulation of Partial Settlement, dated April 23, 1997, between the Company and the Representative
Plaintiffs. (incorporated by reference to Form 10-K for the year ended April 30, 1997)

10.34 Letter Agreement, dated August 13, 1997, between the Company and Counsel Corporation (incorporated by reference
to Form 8-K dated August 15, 1997).

27+ Financial Data Schedule

</TABLE>

* Management contract or compensatory plan or arrangement.

27
<PAGE> 28

+ 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, 1997.

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 17th day of September, 1997.

HEALTH MANAGEMENT, INC.
(Registrant)

By: /s/ James R. Mieszala

James R. Mieszala
(Principal Executive Officer)

By: /s/ Dennis J. Conley

Dennis J. Conley
(Principal Financial Officer)

INDEX TO EXHIBITS

NO. EXHIBIT
<S> <C>
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).

</TABLE>

28
<PAGE> 29

<TABLE>

<S> <C>
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 10-K
for year ended April 30, 1995).

3.5 Certificate of Amendment of Certificate of Incorporation of
the Company, as filed with the Secretary of State of Delaware
on November 8, 1996 (incorporated by reference to Form 10-Q
for the quarter ended January 31, 1997).

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

4.1 Form of 10% Convertible Subordinated Debenture (incorporated
by reference to Form 8-K dated March 4, 199.1).

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).

10.3* 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).
</TABLE>

29
<PAGE> 30

<TABLE>
<S> <C>
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* Letter Agreement dated November 13, 1996, between W. James
Nicol and the Company and guaranteed by Transworld Home
HealthCare, Inc. (incorporated by reference to Form 10-Q for
the quarter ended January 31, 1997).

10.9* Severance Agreement dated August 10, 1997, between W. James
Nicol and the Company. (incorporated by reference to Form
10-K for the year ended April 30, 1997)

10.10* Employment Agreement, dated as of September 9, 1996, between
the Company and James R. Mieszala (incorporated by reference
to Current Report on Form 8-K dated September 16, 1996).

10.11* Letter Agreement dated November 13, 1996, between James R.
Mieszala and the Company and guaranteed by Transworld Home
HealthCare, Inc. (incorporated by reference to Form 10-Q for
the quarter ended January 31, 1997).

10.12* Employment Agreement, dated as of September 9, 1996, between
the Company and Paul S. Jurewicz (incorporated by reference to
Current Report on Form 8-K dated September 16, 1996).

10.13* Letter Agreement dated November 13, 1996, between Paul S.
Jurewicz and the Company and guaranteed by Transworld Home
HealthCare, Inc. (incorporated by reference to Form 10-Q for
the quarter ended January 31, 1997).

10.14 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).

10.15 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).

</TABLE>

30
<PAGE> 31
<TABLE>

<S> <C>
10.16 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).

10.17 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).

10.18 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).

10.19 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).

10.20 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).

10.21 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).

10.22 Forbearance Agreement, dated as of November 13, 1996, between
the Company and Transworld Home HealthCare, Inc. (incorporated
by reference to the Form 8-K dated November 13, 1996).

10.23 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).

10.24 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994

</TABLE>

31
<PAGE> 32

<TABLE>
<S> <C>
(incorporated by reference to Form 10-K for the year ended
April 30, 1995).

10.25 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).

10.26 Stipulation of Partial Settlement dated September 16, 1996,
between the Company and the Representative Plaintiffs
(incorporated by reference to Form 8-K dated September, 1996).

10.27 Amended Stipulation of Partial Settlement dated December 19,
1996, between the Company and the Representative Plaintiffs
(incorporated by reference to Form 8-K, dated December 23,
1996).

10.28 Agreement and Plan of Merger, dated November 13, 1996, as
amended, among IMH Acquisition Corp., Transworld Home
HealthCare, Inc. and the Company (incorporated by reference to
Annex I to the definitive Proxy Statement on Schedule 14A
dated June 16, 1997).

10.29 Stock Purchase Agreement dated as of November 13, 1996,
between the Company and Transworld Home HealthCare, Inc.
(incorporated by reference to Form 8-K dated November 13,
1996).

10.30* 1996 Non-Employee Director Stock Option Plan (incorporated by
reference to Schedule 14A dated October 9, 1996).

10.31* 1996 Employee Stock Option Plan (incorporated by reference to
Schedule 14A dated October 9, 1996)

10.32* 1997 Employee Stock Purchase Plan (incorporated by reference
to Schedule 14A dated October 9, 1996)

10.33 Restated Stipulation of Partial Settlement, dated April 23,
1997, between the Company and the Representative Plaintiffs.
(incorporated by reference to Form 10-K for the year ended
April 30, 1997)

10.34 Letter Agreement, dated August 13, 1997, between the Company
and Counsel Corporation (incorporated by reference to Form 8-K
dated August 15, 1997).

27+ Financial Data Schedule

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HEALTH MANAGEMENT,
INC. FOR THE THREE MONTH PERIOD ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 1,162,000
<SECURITIES> 0
<RECEIVABLES> 44,174,000
<ALLOWANCES> 18,638,000
<INVENTORY> 6,417,000
<CURRENT-ASSETS> 36,123,000
<PP&E> 7,174,000
<DEPRECIATION> 4,821,000
<TOTAL-ASSETS> 38,713,000
<CURRENT-LIABILITIES> 61,863,000
<BONDS> 36,299,000
0
0
<COMMON> 549,000
<OTHER-SE> (24,534,000)
<TOTAL-LIABILITY-AND-EQUITY> 38,713,000
<SALES> 0
<TOTAL-REVENUES> 38,652,000
<CGS> 0
<TOTAL-COSTS> 31,202,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,793,000
<INTEREST-EXPENSE> 870,000
<INCOME-PRETAX> (3,338,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,338,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,338,000)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)

</TABLE>