<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                 Form 10-K/A-3

   XX    Annual Report Pursuant to Section 13 or 15(d) of the Securities and
 ------  Exchange Act of 1934 for the fiscal year ended April 30, 1996.

         Transition report pursuant to Section 13 of 15(d) of the
 ------  Securities Exchange Act of 1934 for transition period 
         from ____________ to ____________.

Commission File No. 0-18472

                            HEALTH MANAGEMENT, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                           75-2096632
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                            Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                              Title of Each Class
                              -------------------
                     Common Stock, $.03 par value per share

         Indicate by check mark whether the Registrant has (1) filed all
reports required to be filed by Section 12 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) been subject to such
filing requirements for the past 90 days.

                            Yes   X         No 
                                -----          -----

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. ______

         As of July 23, 1996, the closing price of the Registrant's common
stock quoted on the NASDAQ National Market was $4.50. The aggregate market
value of the voting stock held by non-affiliates of the Registrant was
$33,138,437. As of July 23, 1996, there were 9,330,182 shares of common stock,
$.03 par value, outstanding. For purposes of the computation of the number of
shares of the Registrant's common stock held by non-affiliates, the shares of
common stock held by directors, officers and principal shareholders that filed
a Schedule 13G were deemed to be stock held by affiliates. As of July 23, 1996,
there were 1,966,085 shares of common stock outstanding held by such
affiliates.



This Annual Report on Form 10-K/A-3 is intended to amend certain information
contained in Part I, Items 7 and 8 of Health Management Inc.'s (the
"Company's") Annual Report on Form 10-K, as amended by the Company's Annual
Report on Forms 10-K/A and 10-K/A-2, for the year ended April 30, 1996 (the
"Original Report"), in order to ensure that the information contained in the
Original Report is true, accurate and complete as of the date of the filing of
the Form 10-K, July 29, 1996.
        
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 adequately to defend or reach a settlement of outstanding litigations
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 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.


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Items 7 and 8 of Part I are hereby amended in their entirety as follows:

Item 7.   Management's Discussion and Analysis of Financial Condition and 
          Results of Operations

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
this Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Other considerations are presented elsewhere in this
Report.

RECENT EVENTS AND OTHER CONSIDERATIONS.

         General. 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 ending July 31, 1994,
October 31, 1994 and January 31, 1995; and for the fiscal quarters ended July
31, 1995 and October 31, 1995. As a result of having to restate the foregoing
reports, the Company filed its Quarterly Report on Form 10-Q for the fiscal
quarter ended January 31, 1996 on April 30, 1996.

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         Unusual and Other Charges. The Company incurred a substantial 
operating loss during the fiscal year 1996. This was a result of unusual
charges recorded in the third quarter of 1996 which consisted of the following:
(1) a $3.6 million charge for costs associated with organizational
consolidations and other cost reduction programs; (2) a $2.8 million charge for
the write-off of medical device inventory; and (3) a $2.0 million charge for
professional fees associated with the Company's restatement and the litigation
as described above.  In addition, the Company recorded an additional provision
for doubtful accounts of $8.4 million in the third quarter of fiscal 1996.
        
         The Company has consolidated its corporate and administrative office
from Holbrook, New York and transferred those functions to its offices in
Buffalo Grove, Illinois. This consolidation, along with other cost reduction
efforts, is expected to yield approximately $1.5 million in annual cost
reductions.

         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. (See "Item 3. 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 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 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, the Company recorded significant charges to its balance sheet
including reductions of the Company's working capital, retained earnings and
shareholder's equity. The Company is presently in default under its Credit
Agreement with Chase Manhattan Bank, N.A., as agent and lender, for among other
things, nonpayment of principal. Accordingly, all long term debt has been
reclassified as a current liability on the Company's balance sheet, which as of
July 29, 1996 was $28.3 million. 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

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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 April 30, 1996 the Company
had goodwill of approximately $34.0 million, or 35% of its assets. A
significant portion of the Company's goodwill relates to the Clorazil 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. (See Notes 1 and 2 to the Consolidated Financial Statements,
"Goodwill and Other Long-Lived Assets" and "Acquisitions" for information on
additions to goodwill in connection with the acquisition of the CPMB.)

         Independent Auditors Opinion. The independent auditor's opinion on the
fiscal year-end financial statements contain a modification relating to the
Company's ability to continue as a going concern. This modification refers to
the default condition on the Company's Credit Agreement and the litigation
described in Item 3 of this Report ("Legal Proceedings"). The Company intends
to vigorously pursue financing alternatives during the period of the
Forbearance Agreement executed with its lenders. There can be no assurances
that any such financing will be successfully consummated.

         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 lead to 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. (See "Item 1. Business--Strategy
for Growth and Expansion".) 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 as 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.

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         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 better ability closely to 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

         Year ended April 30, 1996 as compared to year ended April 30, 1995

         The Company's revenues were $158,859,638 for the year ended April 30,
1996, an increase of $70,403,610 or 79.6% over revenues of $88,456,028 for the
year ended April 30, 1995. Revenues generated from the Company's acquisition of
the Clozaril(R) Patient Management Business accounted for approximately $47.0
million of the increased levels. Additional growth of approximately $6.0 million
was generated from the acquisition of the Arcade and Kaufmann businesses which
were acquired on February 1, 1995 and therefore were reflected in the Company's
financial statements for the entire fiscal year of 1996 as compared to only the
fourth quarter of fiscal 1995. The remainder of the increase was derived from
internal growth through the expansion of the Lifecare(TM) Program and new
referral sources.

         Gross profit margins were 24.3% for the year ended April 30, 1996, a
3.7 percentage-point decline from 28.0% for the preceding fiscal year. The
decrease in the gross profit rate was primarily attributable to the following
factors: (i) a $2.8 million charge was recorded in the third quarter of fiscal
1996 for the write-down of medical device inventory; (ii) a reduction in
reimbursement rates that occurs when the drug benefit is carved out of the
major medical benefit and is converted into a drug card, which generally
provides for a lower reimbursement rate; and (iii) the phase-in of a change in
Medicare regulations extending immunosuppressant drug Medicare benefits to
transplant patients for up to three years post-transplant, as opposed to the
historical one year period, which results in lower reimbursement rates for such
patients covered thereby as compared to those covered by commercial insurance
carriers and other private payors (see "Business of the
Company-Reimbursement-Medicare and Medicaid"). Without the $2.8 million charge,
the gross profit margin would have been 26.1%. These decreases in gross profit
margins were partially offset by the Clozaril(R) Patient Management Business,
which currently generates a higher gross profit margin than the other segments
of the Company's business and which recorded a gross profit of $15,940,480 or
approximately 41% of the Company's overall gross profit in fiscal 1996. The
erosion of the Company's profit margins is typical of recent healthcare
industry trends and is attributable to the pricing pressure exerted by managed
care organizations. The Company is attempting to minimize the further erosion
of gross profit
        
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margins by reducing its costs of service and related support activities and
increasing its volume through focused marketing efforts to spread its fixed
costs over a larger patient base. There are no assurances that the Company will
be successful in these efforts.

         Operating expenses for the fiscal year ended April 30, 1996 were
$49,288,793, an increase of $27,736,604 or 129.0%, over operating expenses of
$21,525,189 for the year ended April 30, 1995. $5.6 million of this increase was
attributable to unusual charges recorded during the third quarter of fiscal year
1996; $3.6 million of the charge was attributable to costs associated with
organizational consolidation and other cost reduction programs, which includes
severance costs of approximately $1.3 million, a goodwill writedown charge of
approximately $550,000 and a charge for the write-off of assets of
approximately $1 million and the accrual of lease termination costs of
approximately $750,000; and $2.0 million was associated with professional fees
arising out of the Company's restatements, litigation, etc. The Company also
increased the provision for doubtful accounts by $8,400,000 in the third quarter
of fiscal 1996.  This increased provision related primarily to the organ
transplant business where collection efforts are more difficult and the
Company's collection efforts were hampered by inadequate staffing levels and
the requisite follow-up.  These efforts are conducted primarily from the
Company's former corporate offices in Long Island, New York, which has been
pacticularily affected by employee turnover.  It was not practical to determine
the potential impact of the additional provision on the first two quarters of
fiscal 1996.  During 1996, the Company also wrote-off approximately $12.6
million of receivables, against the allowance for doubtful accounts, which were
deemed to be uncollectible because of the age of the receivables and, in some
cases, the collectibility period from third party payors had lapsed. Operating
expenses year over year were also affected by the inclusion for the full year
in fiscal 1996 of the Clozaril(R) Patient Management Business versus one month
in fiscal year 1995 and by the inclusion for the full year in 1996 of the
Arcade and Kaufmann business versus three months in the fiscal year 1995. The
Clozaril(R) Patient Management Business was acquired on April 1, 1995. The full
year inclusion of the Clozaril(R) Patient Management Business resulted in an
increase in operating expenses of approximately $9.9 million.

         The operating loss for the fiscal year 1996 was ($10,652,683), a
$13,875,501 change from the operating profit of $3,222,818 for the fiscal year
1995. The unusual and other charges recorded in the third quarter of fiscal year
1996 resulted in the operating loss for the year.

         Net interest expense for the year ended April 30, 1996 was $2,679,504
compared to net interest income of $63,761 in fiscal year 1995. The increase in
interest expense was driven by the outstanding term loans associated with the
CPMB acquisition and the borrowings under the Company's line of credit.

         Loss before income taxes for the year ended April 30, 1996 was 
($13,332,187) compared to a $3,286,579 income level for the year ended
April 30, 1995. The unusual and other charges recorded in the third quarter
contributed significantly to the loss for  fiscal 1996.

         The net loss for the year was ($10,927,341) compared to a net income
of $1,946,188 for the fiscal year ended April 30, 1995. The net loss for the
1996 fiscal year was, in part, the result of the unusual and other
charges recorded in the third quarter of this fiscal year. Also contributing to
the net loss was a valuation allowance of approximately $2.5 million to reserve
for a deferred tax asset. The remaining unreserved deferred tax asset is the
estimated benefit of a net operating loss carryback to the Company.  Given the
circumstances that led to the modification of the independent auditor's opinion,
a valuation allowance was established for the deferred tax asset. 

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         Primary and fully diluted earnings per common share for the year ended
April 30, 1996 were both a ($1.16) loss compared to earnings of $0.21 for the
year ended April 30, 1995. The weighted average number of shares outstanding
used in the calculation of primarily and fully diluted earnings per share were
9,414,500 for the year ended April 30, 1996 and 9,408,300 and 9,420,816,
respectively, for the year ended April 30, 1995.

         Year ended April 30, 1995 as compared to year ended April 30, 1994

          The financial information for the 1995 fiscal year has been restated.
(See the Company's Amended Annual Report on Form 10-K/A-3 for the year ended
April 30, 1995 as filed with the Securities & Exchange Commission on April 30,
1996.)

         The Company's revenues were $88,456,028 for the year ended April 30,
1995, an increase of $44,206,512 or 99.9%, over revenues of $44,249,516 for the
year ended April 30, 1994. Revenues generated through the Company's
acquisitions accounted for approximately $26,500,000 of the additional
revenues, of which approximately $20,000,000 is attributable to the acquisition
of the Murray Group. The balance of the increase in revenues was derived from
internal growth resulting from the expansion of the Lifecare Program into new
disease states and new referral sources.

         Gross profit margins were 28.0% for the year ended April 30, 1995, as
compared to 35.3% for the year ended April 30, 1994. The decrease in gross
profit margin was primarily attributable to the following factors: (i)
increases in Betaseron revenues, which presently yields lower margins than have
been historically achieved by the Company for other disease management
programs; (ii) reductions in the fixed fee reimbursement rates from certain
state Medicaid programs (principally New York, which lowered its reimbursement
by 10%); (iii) a change in Medicare regulations extending immunosuppressant
drug Medicare benefits to transplant patients for up to three years
post-transplant, as opposed to the historical one year post-transplant period,
which results in lower reimbursement rates for patients covered thereby as
opposed to patients covered by commercial insurance carriers and other private
payors; and (iv) reduction of reimbursement rates that occur when the drug
benefit is carved out from the major medical benefit and is switched to a drug
card, which generally provides for a lower reimbursement rate.

         Operating expenses as a percentage of revenues increased to 24.3% for
the year ended April 30, 1995, as compared to 20.5% for the year ended April
30, 1994. Total operating expenses were $21,525,189 for the year ended April
30, 1995, an increase of $12,468,650 over the year ended April 30, 1994. The
increase was a result of the three factors. First, during the last quarter, the
Company consummated three acquisitions which resulted in approximately $550,000
of expenses which were one time charges to operations. Second, expenses to
increase the provision for doubtful accounts were approximately $5,800,000
higher for the fiscal year 1995. Third, to support the Company's continued
expansion, selling and marketing efforts, expenses increased by approximately
$1,051,000, while payroll

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related expense increased by approximately $2,600,000, with the balance of the
increase being general operating expenses. Approximately $300,000 of the
increased payroll expenses and approximately $300,000 of the increased general
operating expenses were attributable to increased staffing, system development
and training in the area of reimbursement as the Company directed greater
effort toward decreasing its days sales outstanding.

         Operating income was $3,222,818 for the year ended April 30, 1995, a
decrease of $3,326,699 or 50.8%, compared to operating income of $6,549,517 for
the year ended April 30, 1994. This decrease is a result of decreases in gross
profit margins and increases in the provisions for doubtful accounts in spite
of significant revenue growth.

         Income before taxes was $3,286,579 for the year ended April 30, 1995,
a decrease of $3,465,064 or 51.3%, compared to $6,751,643 for the year ended
April 30, 1994.

         The effective tax rate for the year ended April 30, 1995 was 40.8%, an
increase of 0.1 percentage points, compared to 40.7% for the fiscal year ended
April 30, 1994.

         Net income was $1,946,188 for the year ended April 30, 1995, compared
to $4,000,958 for the year ended April 30, 1994, a decrease of $2,054,770 or
51.4%.

         Primary and fully diluted earnings per common share for the year ended
April 30, 1995 were $.21 and $.21, compared to $.54 and $.53 for the year ended
April 30, 1994. The weighted average number of shares outstanding used in the
calculation of fully diluted earnings per share was 9,420,816 and 7,593,465 for
the years ended April 30, 1995 and April 30, 1994, respectively.

INFLATION

         Inflation did not have a material effect on the Company's results
during the periods discussed.

LIQUIDITY AND CAPITAL RESOURCES

         The net decrease of $1,282,517 in the Company's cash and cash
equivalents to $3,280,195 at April 30, 1996 was attributable to cash used in
operating activities. Decreases in cash flow from the operating loss and
non-cash adjustments along with increases in allowances for doubtful accounts
were partially offset by increases in accounts payable and decreases in
inventories.

         Working capital at April 30, 1996 was $2,491,619, a decrease from a
$12,486,358 level at April 30, 1995. Current assets increased $7,223,579 due to
increases in accounts receivable of $5,117,390 due to a full year inclusion of
accounts receivable from the CPMB business offset by the increased provision on
the allowance for doubtful accounts, and increases in the tax refund receivable
of $6,210,030 created by the 1996 operating loss. Current assets were decreased
by lowered inventory levels of $986,841 and decreased tax deferred assets of
$1,326,300. Current liabilities increased $17,218,318, principally due to an
increase in accounts payable of $8,384,845 driven by the full year inclusion of
the CPMB business. Total accrued expenses increased $3,222,712 due to the
unusual charge. Current maturities of long-term debt increased to $28,746,028
due to the reclassification of the

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Company's long-term debt as a current liability on its balance sheet, due to
the Company's being in default under its Credit Agreement. As of April 30,
1996, the Company was not aware of any material claims, assessments, disputes,
or unsettled matters with any third-party payors.

         To facilitate the acquisition of the Clozaril(R) Patient Management
business, 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
April 30, 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 believes it will have sufficient cash to support its
normal ongoing operations during the remainder of the 1997 fiscal year, but it
most likely will not have sufficient cash to cure the current default under its
bank debt or to provide for a settlement of the outstanding stockholder class
action litigation.

         As a principal step in its plan to overcome its financial difficulties
and obtain the needed additional funds, 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 "Item 3. Legal Proceedings".) 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 good relations
with its suppliers, it may have to consider protection under the federal
bankruptcy laws.

Stock-Based Compensation

         The Financial Accounting Standards Board Issued Statement of Financial
Accounting Standard Number 123 "Accounting for Stock-Based Compensation" ("SFAS
Number 123") in October 1995. Statement Number 123 encourages companies to
recognize expense for stock options and other stockbased employee compensation
plans based on their fair value at the date of grant. As permitted by Statement
Number 123, the Company plans to continue to apply its current accounting
policy under APB

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Opinion Number 25 "Accounting for Stock Issued to Employees" in 1996 and future
years, and will provide disclosure of the pro forma impact on the net income
and earnings per share as if the fair valuebased method had been applied.

Item 8.   Financial Statements

         The Financial Statements for the fiscal year ended April 30, 1996 may
be found beginning on page F-1 hereof.

Item 14 of Part IV is hereby amended in its entirety as follows:

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)      Documents Filed As A Part of This Report

         (1) Financial Statements. The financial statements of Health
         Management, Inc. and Subsidiaries for the year ended April 30, 1996,
         together with the Report of Independent Certified Public Accountants,
         are set forth beginning on page F-1 hereof.

         (2) Financial Statement Schedules. Financial statement schedules
         required by Items 8 and 14(d) of this Report are set forth following
         page S-1 of the financial statements.

(b)      Reports on Form 8-K

         The Company filed four Current Reports on Form 8-K dated February 27,
         1996, March 21, 1996, April 14, 1996 and April 15, 1996, respectively,
         with the Securities and Exchange Commission, during the fourth quarter
         of the fiscal year ended April 30, 1996. Each of the foregoing Forms
         8-K related to matters described under Item 5 thereof.

(c)      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).

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         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 referenced to
                  Form 10-K for the year ended April 30, 1996).

                                    - 11 -


<PAGE>   12



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

         10.9*    Employment Agreement, dated as of December 18, 1996, between
                  the Company and Paul S. Jurewicz (incorporated by referenced
                  to Form 10-K for the 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

                                    - 12 -


<PAGE>   13



                  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
                  referenced to Form 10-K for the 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 referenced to Form 10-K for the year ended April 30,
                  1996).

         21       Subsidiaries of the Registrant (incorporated by reference to
                  Form 10-K for the year ended April 30, 1996).

         23       Consent of BDO Seidman, LLP**

         27       Financial Data Schedule (incorporated by referenced to Form
                  10-K for the year ended April 30, 1996).

*        Management contract or compensatory plan or arrangement.
**       Filed herewith.

                                    - 13 -





<PAGE>   14

                            HEALTH MANAGEMENT, INC.
                                   AND SUBSIDIARIES




                                      
                      CONSOLIDATED FINANCIAL STATEMENTS
               FORM 10-K/A-3 - ITEM 8 AND ITEM 14(A)(1) AND (2)
                          YEAR ENDED APRIL 30, 1996
<PAGE>   15

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                                                                           INDEX

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                         F-3

CONSOLIDATED BALANCE SHEETS:
 April 30, 1996 and 1995                                                   F-4

CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
 YEARS ENDED APRIL 30, 1996:
 Statements of operations                                                  F-5
 Statements of stockholders' equity                                        F-6
 Statements of cash flows                                            F-7 - F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-9 - F-33





                                                                             F-2
<PAGE>   16

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois

We have audited the consolidated balance sheets of Health Management, Inc. and
Subsidiaries as of April 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended April 30, 1996.  These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
financial statements. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Management,
Inc. and Subsidiaries at April 30, 1996 and 1995 and the results of their
operations and cash flows for each of the three years in the period ended April
30, 1996 in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in Notes 1 and
7 to the accompanying consolidated financial statements, the Company is not in
compliance with the provisions of certain loan agreements and is the defendant
in significant litigation.  These matters raise substantial doubt about the
Company's ability to continue as a going concern.  Management's plans in regard
to these matters are described in Notes 1 and 7.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

BDO Seidman, LLP

Mitchel Field, New York
July 22, 1996, except for Note 4(a)
 which is as of July 26, 1996





                                                                             F-3
<PAGE>   17

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                                     CONSOLIDATED BALANCE SHEETS


<TABLE>                                                                       
<CAPTION>                                                                     
====================================================================================================================================
 April 30,                                                                                     1996                       1995
------------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                                    <C>                        <C>
 ASSETS (NOTE 4(A))                                                                                         
 CURRENT:                                                                                                   
    Cash and cash equivalents                                                           $ 3,280,195                 $4,562,712
    Accounts receivable, less allowance for doubtful accounts of                                            
       approximately $10,070,000 and $7,998,000                                          36,457,199                 31,339,809
    Inventories                                                                           6,800,820                  7,787,661
    Tax refund receivable (Note 6)                                                        8,037,030                  1,827,000
    Deferred taxes (Note 6)                                                               1,807,000                  3,133,300
    Prepaid expenses and other                                                              655,358                  1,163,541
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL CURRENT ASSETS                                                              57,037,602                 49,814,023
 IMPROVEMENTS AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND                                              
    AMORTIZATION (NOTES 3 AND 4)                                                          3,825,974                  2,136,062
 GOODWILL (NOTE 2)                                                                       34,008,496                 35,464,260
 OTHER                                                                                    1,043,607                  1,275,775
------------------------------------------------------------------------------------------------------------------------------------
                                                                                        $95,915,679                $88,690,120
====================================================================================================================================
 LIABILITIES AND STOCKHOLDERS' EQUITY                                                                       
 CURRENT:                                                                                                   
    Accounts payable                                                                    $20,714,836                $12,329,991
    Accrued unusual charges (Note 5)                                                      3,559,000                          -
    Accrued expenses                                                                      1,526,119                  1,862,407
    Current maturities of long-term debt (Note 4)                                        28,746,028                 23,135,267
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL CURRENT LIABILITIES                                                         54,545,983                 37,327,665
 LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 4)                                         4,006,077                  3,191,123
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                                                 58,552,060                 40,518,788
------------------------------------------------------------------------------------------------------------------------------------
 COMMITMENTS AND CONTINGENCIES (NOTE 7)                                                                     
 STOCKHOLDERS' EQUITY (NOTE 8):                                                                             
    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 and 9,316,017                                       279,848                    279,481
    Additional paid-in capital                                                           38,138,771                 38,019,510
    Retained earnings (deficit)                                                          (1,055,000)                 9,872,341
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                                        37,363,619                 48,171,332
------------------------------------------------------------------------------------------------------------------------------------
                                                                                        $95,915,679                $88,690,120
====================================================================================================================================
</TABLE>
                    See accompanying notes to consolidated financial statements.





                                                                             F-4
<PAGE>   18

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                           CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
====================================================================================================================================
 Year ended April 30,                                                1996                      1995                       1994
------------------------------------------------------------------------------------------------------------------------------------
 <S>                                                         <C>                        <C>                        <C>
 REVENUES                                                    $158,859,638               $88,456,028                $44,249,516
                                                       
 COST OF SALES (INCLUDING UNUSUAL CHARGES OF           
   $2,840,000 IN 1996) (NOTE 5)                               120,223,528                63,708,021                 28,643,460
------------------------------------------------------------------------------------------------------------------------------------
       Gross profit                                            38,636,110                24,748,007                 15,606,056
------------------------------------------------------------------------------------------------------------------------------------
 OPERATING EXPENSES:                                   
                                                       
    Selling                                                     4,649,697                 2,898,208                  1,847,197
                                                       
    General and administrative                                 24,324,490                10,648,792                  5,428,342
                                                       
    Provision for doubtful accounts (Note 5)                   14,714,606                 7,978,189                  1,781,000
                                                       
    Unusual charges (Note 5)                                    5,600,000                         -                          -
------------------------------------------------------------------------------------------------------------------------------------
       TOTAL OPERATING EXPENSES                                49,288,793                21,525,189                  9,056,539
------------------------------------------------------------------------------------------------------------------------------------
 INCOME (LOSS) FROM OPERATIONS                                (10,652,683)                3,222,818                  6,549,517
                                                       
 INTEREST EXPENSE                                              (2,717,155)                 (269,316)                   (88,215)
                                                       
 INTEREST INCOME                                                   37,651                   333,077                    290,341
------------------------------------------------------------------------------------------------------------------------------------
       INCOME (LOSS) BEFORE INCOME TAXES                      (13,332,187)                3,286,579                  6,751,643
                                                       
 INCOME TAXES (NOTE 6)                                         (2,404,846)                1,340,391                  2,750,685
------------------------------------------------------------------------------------------------------------------------------------
       NET INCOME (LOSS)                                     $(10,927,341)               $1,946,188                 $4,000,958
====================================================================================================================================
 EARNINGS (LOSS) PER SHARE OF COMMON STOCK             
  - primary                                                        $(1.16)                     $.21                       $.54
====================================================================================================================================
  - fully diluted                                                  $(1.16)                     $.21                       $.53
====================================================================================================================================
 WEIGHTED AVERAGE SHARES OUTSTANDING                   
  - primary                                                     9,414,500                 9,408,300                  7,383,040
====================================================================================================================================
  - fully diluted                                               9,414,500                 9,420,816                  7,593,465
====================================================================================================================================
</TABLE>
                    See accompanying notes to consolidated financial statements.





                                                                             F-5
<PAGE>   19

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                       THREE YEARS ENDED APRIL 30, 1996 (NOTE 8)
================================================================================

<TABLE>
<CAPTION>
                                                                               
                                                           Common Stock                                                    Unearned
                                                          $.03 Par Value                                                  Restricted
                                                      ------------------------  Additional Paid-in   Retained Earnings     Stock  
                                                      Shares            Amount        Capital            (Deficit)      Compensation
------------------------------------------------------------------------------------------------------------------------------------
 <S>                                                  <C>              <C>            <C>               <C>               <C>
 BALANCE, MAY 1, 1993                                 6,076,063        $182,281        $5,647,475         $3,925,195      $       -
    Common stock issued upon exercise of stock                                                                         
       options                                            2,833              85            12,663                  -              -
    Common stock issued upon exercise of stock                                                                         
       warrants                                          40,330           1,210           216,572                  -              -
    Common stock issued upon conversion of                                                                             
       subordinated debentures                          357,145          10,715           364,288                  -              -
    Common stock issued upon public offering          2,000,000          60,000        21,922,258                  -              -
    Common stock issued upon acquisition of Murray                                                                     
       Group                                            617,060          18,512         7,676,230                  -              -
    Restricted stock issued to consultants               11,000             330           113,795                  -       (114,125)
    Compensation under restricted stock                       -               -                 -                  -         57,060
    Net income for the year ended April 30, 1994              -               -                 -          4,000,958              -
------------------------------------------------------------------------------------------------------------------------------------
 BALANCE, APRIL 30, 1994                              9,104,431         273,133        35,953,281          7,926,153        (57,065)
    Common stock issued upon acquisition of:                                                                           
       Pharmaceutical Marketing Alliance                 20,000             600           242,775                  -              -
       Maryland Pharmacies                              108,757           3,263         1,356,112                  -              -
    Common stock issued upon exercise of stock                                                                         
       warrants                                          78,996           2,370           424,208                  -              -
    Common stock issued upon exercise of stock                                                                         
       options                                            2,833              85            24,414                  -              -
    Common stock issued to directors                      1,000              30            18,720                  -              -
    Compensation under restricted stock                       -               -                 -                  -         57,065
    Net income for the year ended April 30, 1995              -               -                 -          1,946,188   
------------------------------------------------------------------------------------------------------------------------------------
 BALANCE, APRIL 30, 1995                              9,316,017         279,481        38,019,510          9,872,341              -
    Common stock issued upon exercise of stock                                                                         
       options                                           12,223             367           119,261                      
    Net loss for the year ended April 30, 1996                                                           (10,927,341)  
------------------------------------------------------------------------------------------------------------------------------------
 BALANCE, APRIL 30, 1996                              9,328,240        $279,848       $38,138,771       $ (1,055,000)     $       -
====================================================================================================================================
</TABLE>
                    See accompanying notes to consolidated financial statements.





                                                                             F-6
<PAGE>   20

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                        (NOTE 9)

================================================================================
<TABLE>
<CAPTION>
 Year ended April 30,                                                         1996                  1995                 1994
------------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                  <C>                    <C>                   <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:                                                                      
    Net income (loss)                                                 ($10,927,341)           $1,946,188           $4,000,958
    Adjustments to reconcile net income (loss)                                                              
       to net cash used in operating activities:                                                            
       Depreciation and amortization                                     2,127,400               846,869              453,149
       Provision for doubtful accounts receivable                       14,714,606             7,978,189            1,781,000
       Deferred taxes                                                    1,326,300            (2,516,300)            (701,315)
       Write-off of improvements and equipment                             263,563                          
       Write-off of goodwill                                               552,432                          
       Write-off of organizational costs                                   134,161                          
       Loss from disposition of rental equipment                                 -               287,287                    -
       Compensation under restricted stock                                       -                57,065               57,060
       Common stock issued to director                                           -                18,750                    -
    Increase (decrease) in cash flows from changes in                                                       
       operating assets and liabilities, net of effects of                                                  
       purchase of CPMB and other acquisitions in 1995 and                                                  
       Murray Group in 1994:                                                                                
         Accounts receivable                                           (19,831,996)          (16,706,549)          (9,624,966)
         Tax refund receivable                                          (6,210,030)           (1,827,000)                   -
         Inventories                                                       986,841            (1,826,911)             205,220
         Prepaid expenses and other                                        508,183              (976,058)            (205,307)
         Other assets                                                       98,008              (239,758)            (249,281)
         Accounts payable                                                8,384,845             4,870,054               99,675
         Accrued unusual charges                                         3,559,000                     -                    -
         Accrued expenses                                                 (336,288)              396,332              203,075
         Income taxes payable                                                                 (1,759,590)             280,467
------------------------------------------------------------------------------------------------------------------------------------
       NET CASH USED IN OPERATING ACTIVITIES                            (4,650,316)           (9,451,432)          (3,700,265)
------------------------------------------------------------------------------------------------------------------------------------
 CASH FLOWS FROM INVESTING ACTIVITIES:                                                                      
    Cash used in acquisition of CPMB                                      (324,366)          (20,630,212)                   -
    Cash used in acquisition of Murray Group                                     -                     -           (7,500,000)
    Other acquisitions                                                           -            (2,167,500)            (250,000)
    Collection of receivable from the seller of                                                             
      Murray Group                                                               -             1,444,426                    -
    Capital expenditures                                                (1,491,722)             (948,368)            (565,815)
    Proceeds from sale of rental equipment                                       -               214,598                    -
------------------------------------------------------------------------------------------------------------------------------------
       NET CASH USED IN INVESTING ACTIVITIES                            (1,816,088)          (22,087,056)          (8,315,815)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>




                                                                             F-7
<PAGE>   21

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                        (NOTE 9)
================================================================================

<TABLE>
<CAPTION>                                                    
 Year ended April 30,                                                      1996                  1995                       1994
------------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                <C>                    <C>                       <C>
 CASH FLOWS FROM FINANCING ACTIVITIES:                                              
    Proceeds from long-term debt                                     16,450,000            23,000,000                          -
    Principal payments on long-term debt                            (11,000,000)                    -                          -
    Net payment on capital leases                                      (385,741)             (123,357)                   (44,202)
    Decrease in bank loan - net                                               -                     -                   (200,000)
    Proceeds from issuance of common stock                                    -                     -                 21,982,258
    Cash paid for deferred borrowing fees                                     -              (722,000)                         -
    Proceeds from exercise of warrants                                        -               426,578                    217,782
    Proceeds from exercise of options                                   119,628                24,499                     12,748
------------------------------------------------------------------------------------------------------------------------------------
       NET CASH PROVIDED BY FINANCING
          ACTIVITIES                                                  5,183,887            22,605,720                 21,968,586
------------------------------------------------------------------------------------------------------------------------------------
 NET INCREASE (DECREASE) IN CASH AND CASH 
   EQUIVALENTS                                                       (1,282,517)           (8,932,768)                 9,952,506
 CASH AND CASH EQUIVALENTS, BEGINNING OF
     YEAR                                                             4,562,712            13,495,480                  3,542,974
------------------------------------------------------------------------------------------------------------------------------------
 CASH AND CASH EQUIVALENTS, END OF YEAR                             $ 3,280,195            $4,562,712                $13,495,480
====================================================================================================================================
</TABLE>
                    See accompanying notes to consolidated financial statements.





                                                                             F-8
<PAGE>   22

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S><C>
1.   BASIS OF PRESENTATION     
     AND SUMMARY OF            
     ACCOUNTING POLICIES       
                               
     ORGANIZATION AND           The  consolidated  financial   statements  include  Health   Management,  Inc.  (formerly   Homecare
     PRINCIPLES OF              Management,  Inc.) (the  "Company"), (a  Delaware corporation),  its wholly-owned  subsidiaries Home
     CONSOLIDATION              Care Management,  Inc. (HMI-NY), HMI Pennsylvania, Inc., HMI Retail Corp. Inc., Health Reimbursement
                                Corp., HMI PMA Inc., HMI  Maryland Inc., and HMI Illinois, Inc.  All  material intercompany accounts
                                and transactions have been eliminated in consolidation.                                             
                                
                               
     BASIS OF PRESENTATION      The Company's consolidated financial  statements have been presented on a going concern basis, which
                                contemplates  the realization of  assets and  satisfaction of  liabilities in  the normal  course of
                                business.   As more fully discussed  in Note 4, the Company  is in violation of  its loan agreements
                                resulting in the related  debt being classified as current liabilities.  The Company and its lenders
                                have agreed to  a forbearance period  during which management  intends to attempt  to arrange for  a
                                refinancing of the  current debt.   Also,  as described in  Note 7,  the Company is  a defendant  in
                                significant litigation  and is the  subject of an investigation  by the Enforcement  Division of the
                                Securities  and Exchange  Commission.   These matters  raise substantial  doubt about  the Company's
                                ability to continue as  a going concern.  The  consolidated financial statements do not  include any
                                adjustments that might result from the outcome of this uncertainty.
                                
     USE OF ESTIMATES           In  preparing  financial statements  in conformity  with  generally accepted  accounting principles,
     AND CONCENTRATION          management is required  to make estimates and assumptions that affect the reported amounts of assets
                                and  liabilities and  the  disclosure  of contingent  assets  and liabilities  at  the  date of  the
                                financial statements and  revenues and expenses during  the reporting period.   Actual results could
                                differ from those estimates.
                               
                                Approximately 46%  of the  Company's revenues  are currently  attributable to  sale of  two products
                                which are  manufactured solely by  one pharmaceutical manufacturer.   If the Company  were unable to
                                purchase these two products, its results of operations would be materially and adversely affected.

</TABLE>




                                                                             F-9
<PAGE>   23

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
     <S><C>
     CREDIT RISK                Financial  instruments  which potentially  subject  the Company  to  concentrations  of credit  risk
                                consist principally of  temporary cash  investments, tax-exempt obligations  and trade  receivables.
                                The Company  places its temporary cash  investments with high credit  quality financial institutions
                                and limits the amount  of credit exposure  to any one  financial institution.   At times, such  cash
                                investments exceed  the Federal Deposit Insurance  Corp. insurance limit.   Concentrations of credit
                                risk with  respect to trade receivables  are limited due to  the diverse group of  patients whom the
                                Company services. No  single customer accounted for a  significant amount of the Company's  sales in
                                the years  ended April 30, 1996,  1995 and 1994.   Approximately 44%,  40% and 35% of  the Company's
                                revenues are  reimbursed under arrangements with  Federal and State medical  assistance programs for
                                the years ended April 30, 1996, 1995,  and 1994.  At April 30, 1996 and 1995, approximately 43%, and
                                36% of the  Company's accounts receivable are  from Federal and  State medical assistance  programs.
                                The  Company  establishes an  allowance for  doubtful accounts  based  upon factors  surrounding the
                                credit risk of specific customers, historical trends and other information.
                                
     INVENTORIES                Inventories are valued  at the lower of cost  or market. Cost is determined by  the first-in, first-
                                out  method (FIFO).  Inventories  are principally  comprised  of prescription  and  over-the-counter
                                drugs.
                                
     REVENUE RECOGNITION        Revenues are recognized  on the date services and related products  are provided to patients and are
                                recorded at amounts estimated to be received  from patients or under reimbursement arrangements with
                                third party payors.
                                
     CASH AND CASH              The  Company considers all highly  liquid investments with  a maturity of three  months or less when
     EQUIVALENTS                purchased to be cash equivalents.
                                
     IMPROVEMENTS AND           Improvements  and  equipment are  stated  at cost.  Depreciation  of equipment  and  amortization of
     EQUIPMENT                  leasehold  improvements are computed  over the estimated  useful lives of  the assets and  the lease
                                term,  respectively,  ranging  from 3  to  7 years  for  equipment  and 13  years  for improvements.
                                Accelerated methods (double declining balance  method)  are used for both book and  tax purposes for
                                all  classes of assets  except for  leasehold improvements which  are amortized  using straight line
                                method.
     
</TABLE>




                                                                            F-10
<PAGE>   24


                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S><C>
          GOODWILL AND OTHER    Goodwill represents the  excess of the  purchase price over  the fair value  of net assets  acquired
          LONG-LIVED ASSETS     through  business  combination, accounted  for  as purchases  (see  Note 2)  and  is amortized  on a
                                straight-line basis over the  estimated period to be benefitted  - thirty years.  During  the fiscal
                                year ended April 30, 1996, the  Company elected the early adoption  of SFAS No. 121 "Accounting  for
                                the Impairment  of Long-Lived Assets  and for Long-Lived  Assets to be Disposed  of."  Prior  to the
                                adoption  of SFAS No.  121, the carrying  value of goodwill  was reviewed periodically  based on the
                                projected gross profits of the businesses acquired over the remaining amortization period.
                                
                                In accordance  with SFAS  No. 121  the  carrying value  of long-lived  assets will  be reviewed  for
                                impairment whenever events or changes  in circumstances indicate that the carrying amount may not be
                                recoverable.    The amount  of impairment is  computed based on the  excess of the  asset's carrying
                                value  over its  fair value  under SFAS 121.   Long-lived  assets acquired  in business combinations
                                accounted  for using  the purchase  method includes the  goodwill that  arose in  those transactions
                                allocated  on  a pro  rata  basis  using the  relative  fair  values of  the  long-lived  assets and
                                identifiable  intangibles acquired at the acquisition  date.  Based on  the Company's analysis under
                                SFAS  No. 121,  the Company  believes that,  other than  the write-off  of  goodwill related  to the
                                Pharmaceutical Marketing Alliance acquisition (see Note 2) totalling $553,000, no  impairment of the
                                carrying value of its long-lived assets  inclusive of allocated goodwill existed at April  30, 1996.
                                The Company's analysis  at April 30, 1996 has  been based on an estimate of  future undiscounted net
                                cash  flows.    Should  the  results  forecasted  not  be achieved,  future  analyses  may  indicate
                                insufficient future  undiscounted net  cash flows  to recover the  carrying value  of the  Company's
                                long-lived assets inclusive  of allocated goodwill,  in which case  SFAS No.  121 would require  the
                                carrying value of such assets to be written down to fair value if lower than carrying value.
                                
          INCOME TAXES          Deferred taxes  are recorded to  reflect the temporary  differences in the  tax bases of  assets and
                                liabilities  and  their  reported  amounts  in  the  financial  statements.  The differences  relate
                                principally to the allowance for doubtful accounts and unusual charges.

</TABLE>




                                                                            F-11
<PAGE>   25

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S><C>  
     EARNINGS PER SHARE         Earnings per  share are computed on  the basis of the  weighted average number of  common shares and
                                common  stock equivalents  outstanding during  the year.  Fully diluted  earnings per  share results
                                mainly from  considering the shares  issuable upon  the conversion of  the convertible  subordinated
                                debentures and adjusting the net income by adding back  the after-tax effect of the interest expense
                                thereon.
                                
     FAIR VALUE OF              The carrying  amounts  of certain  financial instruments,  including cash,  accounts receivable  and
     FINANCIAL                  accounts  payable, approximate fair value as of April  30, 1996 because of the relatively short-term
     INSTRUMENTS                maturity  of these  instruments.   The  carrying  value  of long-term  debt,  including the  current
                                portion, approximates  fair value  as of April  30, 1996  based upon  the borrowing rates  currently
                                available to the Company for bank loans with similar terms and average maturities.
                                
     STOCK-BASED                The Financial  Accounting Standards Board Issued  Statement of Financial Accounting  Standard Number
     COMPENSATION               123  "Accounting  for Stock-Based  Compensation" ("SFAS  Number 123")  in  October 1995.   Statement
                                Number  123  encourages companies  to  recognize expense  for  stock options  and  other stock-based
                                employee  compensation plans  based on  their fair  value at  the date  of grant.   As  permitted by
                                Statement  Number 123, the  Company plans to continue  to apply its  current accounting policy under
                                APB Opinion Number 25 "Accounting for Stock Issued to Employees" in 1996 and future years, and  will
                                provide disclosure  of the pro  forma impact on  net income  and earnings per  share as if  the fair
                                value-based method had been applied.
                                
2.   ACQUISITIONS               (a)    On March  31, 1995,  HMI Illinois, a wholly-owned subsidiary of the Company, acquired certain
                                       assets  subject  to certain  liabilities  of  Caremark  Inc.'s  Clozaril  Patient  Management
                                       Business ("CPMB").   The aggregate purchase price was approximately $23,260,000 consisting of
                                       $20,060,000  in cash provided by bank financing, a  $200,000 escrow deposit, and a $3,000,000
                                       five year subordinated note with an annual interest rate of 8% payable semi-annually.

</TABLE>




                                                                            F-12
<PAGE>   26


                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S><C>
                                       The acquisition  has been accounted  for by the  purchase method of  accounting. The purchase
                                       price has been  allocated to the assets acquired based  on the estimated fair  values of each
                                       asset and liability. The purchased  assets consist primarily of inventory and  equipment. The
                                       excess  of  purchase  price  over  fair  value  of  the  assets  acquired  was  approximately
                                       $22,860,000.
                                       
                                       The unaudited pro-forma condensed combined  statement of income for the year  ended April 30,
                                       1995 giving effect to the acquisition of CPMB by the Company as  if it had occurred as of the
                                       beginning of the year is as follows:
                                       
                                       
                                                      Year ended April 30,                                                   1995
                                                      ------------------------------------------------------------------------------
                                                                                                                (In thousands)
                                                      Revenues                                                           $133,178
                                                      ------------------------------------------------------------------------------
                                       
                                                      Income                                                               $6,237
                                                      ------------------------------------------------------------------------------
                                       
                                                      Net income                                                           $3,505
                                                      ------------------------------------------------------------------------------
                                                      Earnings Per Share
                                       
                                                        Primary                                                              $.37
                                       
                                                        Fully Diluted                                                        $.37
                                                      ------------------------------------------------------------------------------
                                       
                                       
                                       Pro-forma adjustments  included  in  the pro-forma  condensed combined  statement  of  income
                                       consisted  of  amortization  of  goodwill  of  $666,000,  interest  expenses  of  $2,340,000,
                                       allowance for doubtful accounts of $634,000 and increase in cost of sales of $500,000.

</TABLE>




                                                                            F-13
<PAGE>   27

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                             <C>
                                (b)    On  February 6,  1995,  the Company  acquired substantially  all  of the  assets,  subject to
                                       certain liabilities, of two specialty pharmacies located in Maryland.  Immediately  following
                                       this acquisition,  the Company  contributed all of  the acquired assets,  subject to  assumed
                                       liabilities,  to HMI, Maryland, Inc., a  newly formed subsidiary wholly-owned  by the Company
                                       ("HMI-Maryland").     The  aggregate   purchase  price  for  the   two  specialty  pharmacies
                                       approximated  $3,172,000 and consisted of $1,812,500 in cash and cash equivalents and 108,757
                                       newly-issued  shares  of common  stock  of  the  Company discounted  at  25%  and  valued  at
                                       $1,359,500.
                                
                                       The acquisition  has been accounted for  by the purchase  method of accounting.  The purchase
                                       price has been  allocated to the assets  acquired based on  the estimated fair value  of each
                                       asset. The  excess  of purchase  price  over  fair  value of  the  assets  was  approximately
                                       $2,454,000.

                                (c)    On June 16, 1994, the Company acquired  certain assets of Pharmaceutical Marketing  Alliance,
                                       Inc. (PMA) for a total purchase price of $598,375 which is comprised of cash  of $355,000 and
                                       20,000  shares  of  common  stock.  Immediately  following  this  acquisition,  the   Company
                                       contributed all of the acquired  assets, subject to assumed  liabilities to HMI-PMA, Inc.,  a
                                       newly-formed wholly-owned subsidiary.  The Company  also entered into a three-year employment
                                       agreement with three employees of PMA at an aggregate of $225,000 per annum.
                                
                                       The  operations of HMI-PMA were  closed during fiscal year  1996.  Costs associated with this
                                       closure,  including  write-off  of  goodwill  of  $553,000  and  termination  of   employment
                                       agreements were  recorded in  the year ended April  30, 1996.  The write-off and  the related
                                       charges were part of the $3,600,000 charge discussed in Note 5.

</TABLE>




                                                                            F-14
<PAGE>   28

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                             <C>
                                (d)    On  April 1,  1994,  the Company  acquired  substantially all  of  the net  assets  of Murray
                                       Pharmacy,  Inc. and  Murray  Pharmacy  Too, Inc.  (collectively  "Murray Group"),  for  total
                                       consideration of up to $16,195,000, comprised  of cash of $7,500,000, 617,060 shares of  non-
                                       registered common stock  of the Company, discounted  at 25% and  valued at $7,695,000, and  a
                                       $1,000,000 earn-out based on performance of the companies  for the year ended April 30, 1995.
                                       The $1,000,000  earn-out was  not recorded because  the specified performance  level was  not
                                       achieved.
                                
                                       In connection with  the acquisition, the Company entered  into employment agreements with the
                                       two shareholders of  the Murray Group.  The Company  also entered into  leases for  buildings
                                       owned by the two Murray Group's shareholders (see Note 6(a)).

                                       The acquisition  has been accounted for  by the purchase  method of accounting.  The purchase
                                       price has  been allocated to  the assets acquired based  on the estimated fair  value of each
                                       asset. The purchased  assets consist primarily  of accounts  receivable and  inventory.   The
                                       excess  of  purchase price  over  the fair  value of  the  assets acquired  was approximately
                                       $10,100,000.
                                
                                
                                
                                 As a  result of  the above acquisitions,  total excess  of purchase price  in excess  of net assets
                                 acquired are as follows:
                                
                                               April 30,                                                   1996              1995
                                               -------------------------------------------------------------------------------------
                                               Goodwill resulting from acquisition of:

                                               CPMB                                                 $22,860,251       $22,535,855

                                               Maryland pharmacies                                    2,453,959         2,453,959
                                
                                               PMA                                                            -           581,507

                                               Murray group                                          10,099,860        10,099,860

                                               Other                                                    250,000           250,000
                                               -------------------------------------------------------------------------------------
                                                                                                     35,664,070        35,921,181
                                               Less: accumulated amortization                         1,655,574           456,921
                                               -------------------------------------------------------------------------------------
                                                                                                    $34,008,496       $35,464,260
                                               =====================================================================================
                                
</TABLE>



                                                                            F-15
<PAGE>   29

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>  <C>                                   <C>                                                 <C>                <C>
3.   IMPROVEMENTS AND                      Improvements and equipment consist of the following:
     EQUIPMENT                                
                                           April 30,                                                       1996              1995
                                           -----------------------------------------------------------------------------------------
                                           Furniture and equipment                                   $2,380,978        $1,575,503
                                                                          
                                           Transportation equipment                                     104,090            88,906
                                                                          
                                           Computer equipment                                         2,689,619           777,133
                                                                          
                                           Leasehold improvements                                       365,743           491,108
                                           -----------------------------------------------------------------------------------------
                                                                                                      5,540,430         2,932,650

                                           Less accumulated depreciation and
                                                        amortization                                  1,714,456           796,588
                                           ----------------------------------------------------------------------------------------
                                                                                                     $3,825,974        $2,136,062
                                           =========================================================================================
                                               
                                               
4.   LONG-TERM DEBT                         Long-term debt consists of the following:

                                                 April 30,                                                  1996               1995
                                           -----------------------------------------------------------------------------------------
                                           Term loan (a)                                             $18,000,000        $21,000,000
                                                                                              
                                           Revolving credit (a)                                       10,350,000          2,000,000
                                                                                              
                                           Subordinated note payable (b)                               3,000,000          3,000,000
                                                                                              
                                           Capitalized leases and notes payable               
                                             requiring monthly payments of $42,252            
                                             including assumed interest ranging from          
                                             3.2% to 21%, collateralized by equipment         
                                             with a book value of $1,354,708.                          1,402,105            326,390
                                           -----------------------------------------------------------------------------------------

                                                                                                      32,752,105         26,326,390
                                                 
                                                 Less current maturities                              28,746,028         23,135,267
                                           -----------------------------------------------------------------------------------------
                                                                                                     $ 4,006,077        $ 3,191,123
                                           =========================================================================================

</TABLE>




                                                                            F-16
<PAGE>   30

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S><C>
                              (a)    On  April 4, 1995, the Company borrowed $21,000,000 on a term loan to fund the cash portion of
                                     the acquisition of CPMB (Note 2(a)).   The term loan bears interest at a rate of .5% above the
                                     Alternative Base  Rate (as defined  by the Credit Agreement  and was 8.75% at  April 30, 1996)
                                     and  is convertible  into Eurodollar  loans.   The principal  was payable  over five  years in
                                     quarterly installment payments  of $750,000 through  March 31, 1996; $1,000,000  through March
                                     31, 1997, $1,250,000 through March 31, 1999 and $1,000,000 through March 21, 2000.
                              
                                     The  Credit Agreement  provided  for  a revolving  credit  facility  of up  to  $15,000,000,
                                     including up  to a $1,000,000  letter of credit  facility.   This agreement had  an original
                                     expiration  date of  March  1997.   Borrowings  under  this facility  bear  interest at  the
                                     Alternative Base  Rate  (as  defined  in  the Credit  Agreement)  and  is  convertible  into
                                     Eurodollar loans.  At  April 30, 1996, the Company had borrowings  under this line of credit
                                     of $10,350,000 bearing interest at 8.25% on $6,350,000 and 7.5% on $4,000,000.
                          
                                     The term loan and  the revolving credit  facility are collateralized  by an assignment of  a
                                     security interest in all assets of the Company and its subsidiaries.
                              
                                     The  agreements  contains   restrictions  relating  to  the  payment  of  dividends,  liens,
                                     indebtedness, investments and capital expenditures.  In addition, the Company  must maintain
                                     certain financial ratios and a  minimum net worth. As  a result of the matters  discussed in
                                     Note 7(d) and  the unusual charges  described in  Note 5, the  Company was  in violation  of
                                     certain  provisions of the  Credit Agreement.   Accordingly,  all borrowings under  the term
                                     loan and the revolving credit facility are classified as current.
                          
</TABLE>




                                                                            F-17
<PAGE>   31

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                   <C>
                                      On  July  26, 1996,  the  Company  and the  lenders  under  the agreements  entered  into  a
                                      forbearance agreement covering  the period from July  26, to November 15, 1996.   Under this
                                      agreement, the lenders agreed  subject to certain conditions, to forbear from exercising any
                                      of  their legal,  contractual or  equitable rights  of  remedies in  respect of  any  of the
                                      existing events of  default during the  above forbearance period  and the Company agreed  to
                                      certain revised financial covenants and  reporting requirements.  The  forbearance agreement
                                      also  reduced  the  availability  under  the  revolving  credit  facility  to a  maximum  of
                                      $1,500,000 over the borrowings currently outstanding.
                                
                                      Concurrently, the  Company engaged National Westminster Bank PLC  ("Nat West") to act as its
                                      financial  advisor  to explore  a  variety of  strategic  and financial  alternatives.   The
                                      Company requires additional financing to  remedy the default condition of its term  loan and
                                      borrowings  under revolving  credit  facility.   In order  to  satisfy such  obligations the
                                      Company may consider engaging in a public or private  offering of securities of the Company.
                                      There is no assurance that such financing can be obtained.

                                (b)   In connection  with the  CPMB acquisition  (see Note 2(a)),  the Company  is obligated  on a
                                      $3,000,000  unsecured  subordinated note,  bearing  interest at  an  annual rate  of  8% and
                                      maturing March 31, 2000.
                                
                                      As a result of the restatement  of the Company's April 30, 1995 financial statements and the
                                      provision  of  unusual  charges (see  Note  5), the  Company  did not  meet  certain  of the
                                      financial ratios as  required by the note.    As a result, the note became  convertible into
                                      the  Company's  common stock  upon  notice  received  from  the holder  of  the  note.   The
                                      conversion price is based upon the average closing  price of the Company's common stock  for
                                      the  ten trading days  immediately proceeding the conversion  date and the  ten trading days
                                      immediately subsequent to  the conversion date.   The Company  has not received notice  from
                                      the noteholder for conversion.
                                

</TABLE>



                                                                            F-18
<PAGE>   32

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<S>  <C>                      <C>
                              The  maximum amount  of short-term borrowings  outstanding during  the years ended April  30, 1996,
                              1995 and  1994  was $10,350,000  $2,300,000 and  $2,000,000,  respectively.   The  average  amounts
                              outstanding  for the  years ended  April 30,  1996,  1995 and  1994 were  $7,696,000,  $592,000 and
                              $796,000, respectively.   The average borrowing rates were 8.37%, 8.875% and 7% for the years ended
                              April 30, 1996, 1995 and 1994, respectively.
                              
                              Long term debt matures as follows:
                              
                              
                              Year ended April 30,
                              -----------------------------------------------------------------------------------------------------
                                   1997                                                              $28,746,028

                                   1998                                                                  377,771
                              
                                   1999                                                                  315,873
                              
                                   2000                                                                3,245,162

                                   2001                                                                   67,271
                              -----------------------------------------------------------------------------------------------------
                                                                                                     $32,752,105
                             ======================================================================================================
                              
                              
5.   Unusual Charges         The following charges were incurred during the year ended April 30, 
     And Other Charges       1996:
     



                             Included in costs of sales:
                                . Write-off of medical device inventory (a)                          $2,840,000
                             ======================================================================================================

</TABLE>



                                                                            F-19
<PAGE>   33

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S><C>
                             Included in the provision for doubtful accounts:
                             
                                . Additional provision reflecting a change in the
                                  estimation of the allowance for doubtful accounts (b)              $8,400,000
                             ======================================================================================================
                             
                                Unusual charges:
                             
                                . Cost associated with organizational consolidation and
                                  other cost reduction programs (c)                                   3,600,000
 
                                . Professional fees related to the Company's litigation and
                                  restatement of fiscal 1995 financial statements (see Note
                                  7(d))                                                               2,000,000
                              -----------------------------------------------------------------------------------------------------
                                                                                                     $5,600,000
                             ======================================================================================================
                             
                             
                             (a)    Through January 31,  1996, the Company purchased approximately $3.5 million of medical device
                                    inventory under  a purchase  agreement  which provided  for a  total purchase  commitment  of
                                    approximately $5.4 million  in return for an  exclusive right to distribute in the  home care
                                    market.   A substantial  portion of  the $3.5  million was purchased  during the  nine months
                                    ended January 31, 1996.
                             
                                    This  device was originally  targeted for use  in the  multiple sclerosis market  but was not
                                    being utilized  in  the  treatment  of  such  condition  because  of  the  concerns  of  drug
                                    manufacturers and physicians  that the  device could affect  the molecular  stability of  the
                                    drug being administered.  The  lack of acceptance of such device  was conclusively identified
                                    during the third quarter of fiscal 1996.

</TABLE>




                                                                            F-20
<PAGE>   34


                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                 <C>
                                    As a result, in January  1996, the Company notified the manufacturer of  this device that the
                                    Company would cease further purchase of such product.   The Company also negotiated a  return
                                    agreement whereby the manufacturer of the  device purchased back the inventory in return  for
                                    the forgiveness  of $322,000 payable to the manufacturer  from the Company and payment to the
                                    Company of  $338,000.  Accordingly,  the Company wrote down  its medical device  inventory by
                                    $2,840,000.
                             
                             (b)    The Company had an evaluation of its allowance  for doubtful accounts completed in the  third
                                    quarter of fiscal 1996,  using a statistical sampling approach to its receivables.   Based on
                                    the result of this sampling, the Company  concluded that its allowance for doubtful  accounts
                                    was understated  by  $8.4 million.   Accordingly,  the Company  provided  an additional  $8.4
                                    million allowance  during the quarter ended January 31, 1996 when  it revised its estimate of
                                    the required allowance for doubtful accounts.

                             (c)    The  organizational  consolidation  costs  include  termination  benefits  accrued  totalling
                                    $1,271,000 related  to the  Company's January  1996 plan of  termination of  approximately 30
                                    employees  as part of the consolidation of  the Company's accounting and executive offices in
                                    Buffalo  Grove, Illinois.   Through April 30, 1996,  $545,000 of such  benefits had been paid
                                    leaving a balance of $726,000.
                             
                                    The  remaining  organizational  consolidation  costs  and  other  cost  reduction   programs,
                                    totalling $2,329,000 can be summarized as follows:
                             
                                    Estimated lease termination costs                                     $766,000
                                    Write off of PMA goodwill                                              553,000
                                    Write off of PMA and New York fixed assets                             397,000
                                    Write off of deferred financing costs                                  613,000
                                                                                                        ----------
                                                                                                        $2,329,000
                                                                                                        ==========
</TABLE>






                                                                            F-21
<PAGE>   35

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S><C>                               
                                    Estimated lease  termination costs represent the  lease expense for the  remaining lease term
                                    of the  New  York headquarters  which  is  to be  closed.   The  write  off of  PMA  goodwill
                                    represents the carrying  value of goodwill  of HMI-PMA (see Note  2(c)), which was  closed in
                                    fiscal 1996.   The write off of PMA  and New York fixed assets represents  the net book value
                                    of leasehold improvements  of PMA and the New  York headquarters to be closed.   Write off of
                                    deferred financing  costs represents deferred  financing costs resulting  from the  Company's
                                    April 1995 term loan and credit agreement under which the Company is currently in default.
                             
                                    Through April  30, 1996, write-off  of fixed assets,  goodwill and related  long lived assets
                                    amounted to $950,000, leaving a balance of $1,379,000.

                                    The  above remaining liabilities of $726,000 and  $1,379,000 and the unpaid professional fees
                                    of $1,454,000 as of April 30, 1996 were included in accrued unusual charges,  the majority of
                                    which are expected to be paid within the year ended April 30, 1997.
                             
                             
                             
6.   INCOME TAXES            The income tax expenses (benefits) are comprised of the following:
                             
                              Year ended April 30,                        1996            1995            1994
                              -------------------------------------------------------------------------------------------------
                              Current:
                                 Federal                           $(4,398,902)     $2,793,223      $2,640,000
                                 State and local                       667,756       1,063,468         812,000
                              -------------------------------------------------------------------------------------------------
                                                                    (3,731,146)      3,856,691       3,452,000
                              -------------------------------------------------------------------------------------------------
                              Deferred
                                 Federal                               989,000      (1,851,000)       (580,000)
                                 State and local                       337,300        (665,300)       (121,315)
                              -------------------------------------------------------------------------------------------------
                                                                     1,326,300      (2,516,300)       (701,315)
                              -------------------------------------------------------------------------------------------------
                              Total income taxes                   $(2,404,846)     $1,340,391      $2,750,685
                              =================================================================================================
</TABLE>




                                                                            F-22
<PAGE>   36

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<S>                          <C>
                             The following reconciles the federal statutory tax rate with the actual effective
                             rate:
                             
                             Year ended April 30,                        1996            1995            1994
                             ----------------------------------------------------------------------------------
                             Statutory rate                               (34%)            34%             34%
                             Increase (decrease) in tax rate
                                resulting from:
                                State and local taxes, net of
                                  federal benefit                           5%              7               7
                                Change in deferred tax assets
                                  valuation allowance                      11%              -               -
                             ----------------------------------------------------------------------------------
                             Effective rate                               (18%)            41%             41%
                             ==================================================================================

                             Deferred tax assets (liabilities) consist of the following:
                             
                             April 30,                                                    1996             1995
                             ----------------------------------------------------------------------------------
                             Deferred tax assets resulting from:
                                Allowance for doubtful accounts                     $4,532,000       $3,163,000
                                Unusual charges                                        535,000                -
                             Deferred tax liability - difference in carrying
                                value of goodwill for book and tax                    (734,000)         (29,700)
                             ----------------------------------------------------------------------------------
                                                                                     4,333,000        3,133,300
                             Valuation allowance                                    (2,526,000)               -
                             ----------------------------------------------------------------------------------
                                                                                    $1,807,000       $3,133,300
                             ==================================================================================
</TABLE>                     
                             
                             
                             
                             
                             
                                                                            F-23
<PAGE>   37

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                           <C>
                              A valuation allowance for the deferred tax  assets was provided because of uncertainty as to future
                              realization of the deferred tax assets (exclusive  of the remaining carryback benefit) as  a result
                              of the substantial doubt about the Company's ability to continue as a going concern.
                              
                              As of April 30, 1996,  the Company recorded a $8,037,030 tax  refund receivable, which consisted of
                              $1,344,000 of  tax refund receivable from amended 1995 tax  returns as a result  of the restatement
                              of  fiscal 1995  financial statements,  $2,530,030 of  excessive estimate  taxes  paid in  1996 and
                              $4,163,000 estimated refund claim due to 1996 net operating loss carryback.


7.    COMMITMENTS AND         (a)  LEASES
      CONTINGENCIES     

                                   The  Company  leases its  offices,  warehouse  and retail  pharmacies  under operating  leases
                                   expiring  at various  times  through August  2002.  The  Company also  leases  data processing
                                   equipment under agreements which  expire at  various times through  2000.   These leases  have
                                   been classified as capital leases (Note 3).

                                   As  of  April  30,  1996,  future  net   minimum  lease  payments  under  capital  leases  and
                                   noncancellable operating lease agreements are as follows:
                                                                                                Capital              Operating
                                  -----------------------------------------------------------------------------------------------
                                                      1997                                        $416,241          $1,296,629
                                   
                                                      1998                                         389,908           1,088,500
                                                      1999                                         312,249             765,575
                                                      2000                                         227,870             680,728
                                                      2001                                          68,405             177,447
                                                      Thereafter                                         -              97,654
                                  -----------------------------------------------------------------------------------------------
                                  Total minimum lease payments                                   1,414,673           4,106,533
                                  Less amounts representing interest                               179,803                   -
                                  -----------------------------------------------------------------------------------------------
                                  Net minimum lease payments                                    $1,234,870          $4,106,533
                                  =============================================================================================== 
</TABLE>




                                                                            F-24
<PAGE>   38

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<S>                         <C>
                               Rent  expense  for the  years  ending April  30,  1996, 1995,  and 1994  amounted  to $1,544,788,
                               $364,448 and $252,534, respectively  which included rent expense for  the buildings owned by  the
                               two Murray  Group shareholders amounted to $106,400, $106,410 for  the years ended April 30, 1996
                               and 1995.
                             
                             
                             (b)   RETIREMENT PLAN
                             
                                   Effective  August 1,  1990,  the Company  established  a 401(K)  plan  for eligible  salaried
                                   employees. The  contribution for any participant  may not exceed statutory  limits. After one
                                   year  of employment, the Company will match  40% of each employee participant's contributions
                                   up  to  the first  5%  of  compensation. The  total  matching  contributions charged  against
                                   operations amounted  to $178,844,  $71,281 and $22,935  for the years  ended April  30, 1996,
                                   1995 and 1994.
                             
                             
                             (c)   EMPLOYMENT AGREEMENTS
                             
                                   The  Company has  in effect employment  agreements with  certain key  officers and employees,
                                   which expire  at various  dates through  May, 1999.   Total salaries  under these  agreements
                                   amount to approximately $900,000 annually.
                             

</TABLE>



                                                                            F-25
<PAGE>   39

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                               <C>
                             (d)   LITIGATION
                             
                                   (1)   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 will be
                                         consolidated shortly into one  action. These actions allege claims under Sections  10(b)
                                         and  20(a)  of  the  Securities  and  Exchange Act  of  1934,  arising  out  of  alleged
                                         misrepresentations  and omissions  by  the  Company in  connection with  certain  of its
                                         disclosure  statements.   These 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.   These 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  proposed  Order of  Consolidation,  the
                                         Company will not  be required  to answer or  otherwise move in  the consolidated  action
                                         until thirty days after it is served with  an amended consolidated complaint, which  has
                                         not yet been served on the Company.

                                         Certain of the  Company's current and former officers  and directors 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.   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  corporate
                                         filings,  as more  fully  alleged in  the above-described  class  action lawsuit.    The
                                         consolidated action seeks unspecified monetary damages on  behalf of the Company as well
                                         as declaratory  and  injunctive  relief.   Pursuant  to  the  Stipulation and  Order  of
                                         Consolidation,  the  Company  is  not required  to  answer  or  otherwise  move  in  the
                                         consolidated action  until sixty days  after it is  served with  an amended consolidated
                                         complaint, which has not yet been served on the Company.


</TABLE>



                                                                            F-26
<PAGE>   40

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                <C>
                                   The Company's auditors  have 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.   The  complaint against the Company's  auditors
                                   alleges  claims  for  misrepresentations  and  omissions  contained  in  certain  of the
                                   Company's corporate filings. 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 indefinitely adjourned.
                             
                                   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.

                             (2)   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. vs. Health Management  Inc., 96 Civ.  2330 (ADS).   The action alleges
                                   claims for  breach of contract and  accounts stated arising out  of a dispute  regarding
                                   payments for  certain goods.   The action  seeks damages in the  amount of $3,187,157.35
                                   together  with  interest,  costs  and  disbursements.    The  Company  has  answered the
                                   complaint,  complied with  its automatic  disclosures  obligations  and has  reduced the
                                   accounts payable to approximately $2,600,000 as of July 26, 1996.


</TABLE>



                                                                            F-27
<PAGE>   41

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                <C>
                             (3)   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 actions 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.   The motion also seeks to  amend the
                                   state court complaint to  add certain other defendants.   These proposed  defendants, by
                                   notice  of  removal dated  March  22,  1996,  removed  the state  court  action  to  the
                                   Bankruptcy Court of the Eastern District  of New York.   By motion dated April 2,  1996,
                                   APP requested that the Bankruptcy Court remand the action  to the State Court, which the
                                   Bankruptcy Court granted.   HMI opposed the motion to  amend the complaint in the  State
                                   Court.  The  motion 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.

</TABLE>




                                                                            F-28
<PAGE>   42


                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                   <C>
                                         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 preliminary  ruled to grant APP's  remand
                                         motion, but provided the Hutsons a further opportunity  to submit a written response  to
                                         the motion.
                                   
                                   The  Company is presently  unable to determine  the possible outcome  and costs of  the final
                                   resolution  of the  litigation discussed  above.   Accordingly,  it  has not  provided for  a
                                   possible loss.   The resolution of these matters could have  a material adverse effect on the
                                   Company's financial position and future results of operations in the near term.

</TABLE>




                                                                            F-29
<PAGE>   43


                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                      <C>      
8.    CAPITAL TRANSACTIONS   (a)   PUBLIC OFFERINGS
                             
                                   On November 18, 1993, the  Company completed a secondary public offering of  2,000,000 shares
                                   of stock at $12.00  per share.  Proceeds from this offering, net  of expenses of the offering
                                   of $2,017,742, were $21,982,258.
                             
                             (b)   OPTIONS AND WARRANTS
                             
                                   Stock options and warrants activities are shown below:
                                   
                                                             Omnibus       Incentive
                                                         Incentive Stock  Stock Option                Directors'
                                                         Option Plan (1)    Plan (2)     Warrants     Options (3)
                                   ----------------------------------------------------------------------------------
                                   Shares covered            1,000,000       50,000       130,662        26,000
                                   ----------------------------------------------------------------------------------
                                   Outstanding at May 1,
                                   ----------------------------------------------------------------------------------
                                     1993                            -       12,221       130,662             -
                                   
                                     Granted                   420,000        2,500             -        19,000
                                     Exercised                       -       (2,833)      (40,330)            -
                                     Cancelled                       -         (833)            -             -
                                   ----------------------------------------------------------------------------------
                                   Outstanding at April
                                     30, 1994                  420,000       11,055        90,332        19,000
                                     Granted                   132,500            -             -         4,000
                                   
                                     Exercised                  (2,000)        (833)      (78,996)            -
                                     Cancelled                       -            -             -             -
                                   ----------------------------------------------------------------------------------
                                   Outstanding at April
                                     30, 1995                  550,500       10,222        11,336        23,000
                                     Granted                   709,000            -             -         3,000
                                     Exercised                 (11,000)      (1,223)            -             -
                                     Cancelled                (309,500)
                                   ----------------------------------------------------------------------------------
                                   Outstanding at April
                                     30, 1996                  939,000        8,999        11,336        26,000
                                   ==================================================================================

                                   At April 30, 1996:
                                   Price range                   $4.98 -       $.90 -                 $10.875 -
                                                                $10.38        $4.50         $5.40     $18.840
                                   Shares exercisable          346,833        8,999        11,336      26,000
                                   Available for grant             -0-        5,669             -           -
                             
</TABLE>




                                                                            F-30
<PAGE>   44

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                            <C>
                               (1)    On  May  26,  1993 the  Compensation  Committee  authorized  and  on  October 14,  1993,  the
                                      stockholders approved the establishment of  an omnibus incentive stock option plan to provide
                                      incentives for key  employees and members  of the Board of  Directors. The maximum  number of
                                      shares issuable under the plan  is 10% of the outstanding shares up  to 1,000,000 shares. The
                                      exercise period for  an option shall not exceed  ten years from the date  of grant, except in
                                      the case of  a more than 10% stockholder such period shall not  exceed five years. The option
                                      price  per share shall be  not less than  the average market value  or, in the case  of a 10%
                                      stockholder  with respect  to incentive  stock options,  110% of  fair value  on the  date of
                                      grant.
                              
                               (2)    On February 16, 1990,  the Company approved  the adoption of an  incentive stock option  plan
                                      covering 50,000 common shares. The options are exercisable over a ten year period.

                               (3)    During the years ended April 30, 1996, 1995 and 1994, the Company granted a total  of 19,000,
                                      4,000 and 3,000 options to its outside directors  at an exercise price of $18.84, $16.77, and
                                      $10.875 to $12.088, the market price on the date of the grant, respectively.
                              
                               (4)    Pursuant to a special meeting of the  executive committee of the board of directors on  April
                                      3, 1996, members of  the special committee of the board of  directors were granted a total of
                                      25,000 options and 75,000 stock appreciation rights.
                              
                                      The per share exercise price for the  stock options and appreciation rights is a price  equal
                                      to the average closing price of the  shares for the five trading days preceding April 3, 1996
                                      or $4.8375.  The vesting schedule for each of the stock options and stock appreciation rights
                                      is one-half upon  the appointment of  the permanent Chief Executive  Officer and one-half  on
                                      May 1, 1997.
                
                               At April 30, 1996,  shares of the Company's authorized  and unissued common stock were  reserved for
                               issuance upon  exercise of options  and warrants,  which included 1,009,335  shares for  outstanding
                               options and warrants and 5,669 shares for options available for grant.

</TABLE>




                                                                            F-31
<PAGE>   45

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                            <C> 
                               (c)    RESTRICTED STOCK
                               
                                      On  May 1,  1993,  the Company  awarded 11,000  shares of  restricted  common stock  to three
                                      outside  consultants.  The shares awarded are subject to certain restrictions and forfeiture.
                                      Vesting occurs over a two year period  from the date the shares are awarded.  The shares were
                                      recorded  at their  quoted  market  value at  the date  of  grant of  $10.375  per share,  or
                                      $114,125.   The compensation  element related  to the awarding  of such  shares is recognized
                                      ratably over the  two-year restriction period.   Compensation  expense recognized related  to
                                      such shares  for the  years  ended April  30, 1996,  1995 and  1994  were $-0-,  $57,065  and
                                      $57,060, respectively.
                               
                               
9.    SUPPLEMENTAL CASH        (a)    Supplemental disclosures of cash flow information:
      FLOW INFORMATION         
                               
                                      Year ended April 30,              1996              1995             1994
                                      ---------------------------------------------------------------------------------------------
                                      (1)  Cash paid for
                                             interest expense     $2,381,667          $174,430          $94,468
                                      (2)  Cash paid for
                                             income taxes         $1,949,491        $7,745,067       $3,157,483

                                (b)   Supplemental disclosures of non-cash investing and financing activities:
                               
                                      (1)    The Company financed $1,361,455 and  $177,286 of new equipment during the  years ended
                                             April 30, 1996 and 1995.
                               
                                      (2)    During the year ended  April 30, 1995, $3,000,000 of the purchase  price of CPMB was a
                                             five year subordinated note (Note 2(a)).

                                      (3)    During the  year ended  April  30, 1995,  the Company  issued 128,757  shares of  non-
                                             registered common stock in connection with the  acquisition of Maryland pharmacies and
                                             PMA (Note 2(b) and (c)).
                               
                                      (4)    During  the  year  ended  April  30,  1994,  holders  of  $374,999  of  the  Company's
                                             convertible  subordinated  debentures converted  their  debt  into  357,145 shares  of
                                             common stock.

</TABLE>




                                                                            F-32
<PAGE>   46

                                        HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                        <C> 
                                      (5)    During the year ended April 30,  1994, the Company awarded 11,000 shares of restricted
                                             common stock to three outside consultants. (Note 7(d)).
                                      
                                      (6)    During  the year  ended April  30, 1994,  the Company  issued  617,060 shares  of non-
                                             registered common stock in connection with the Murray acquisition. (Note 2(d)).


10.    QUARTERLY FINANCIAL      The following table summarizes quarterly results:
       INFORMATION
       (UNAUDITED, IN           Year Ended April      First         Second        Third        Fourth                        
       THOUSANDS, EXCEPT        30, 1996             Quarter       Quarter       Quarter       Quarter       Year            
       FOR PER SHARE DATA)      ---------------------------------------------------------------------------------------------
                                REVENUE              $38,294        $39,275       $40,801      $40,490    $158,860           
                                GROSS PROFIT          11,761          9,155         7,331*      10,389      38,636           
                                INCOME (LOSS)                                                                                
                                   BEFORE INCOME                                                                             
                                   TAXES               2,700            239       (16,786)*        514     (13,333)          
                                NET INCOME (LOSS)      1,589            139        (9,904)*     (2,751)**  (10,927)          
                                EARNINGS (LOSS)                                                                              
                                PER COMMON SHARE         .17            .01         (1.06)        (.28)      (1.16)          

                                Year Ended April      First         Second        Third        Fourth                        
                                30, 1995             Quarter       Quarter       Quarter       Quarter       Year 
                                -----------------------------------------------------------------------------------------------
                                REVENUE:              17,216         20,884        21,982       28,374      88,456           
                                GROSS PROFIT:          4,986          6,103         6,813        6,846      24,748           
                                INCOME (LOSS)                                                                                
                                   BEFORE INCOME                                                                             
                                   TAXES:                545          1,807         2,248       (1,313)      3,287           
                                NET INCOME                                                                                   
                                   (LOSS):               304          1,044         1,455         (857)      1,946           
                                EARNINGS (LOSS)                                                                              
                                PER COMMON SHARE         .03            .11           .15         (.09)        .21           
                                                                                                                             
                                
                                

                                *      The Company incurred unusual charges of $16,840,000 in the third quarter  of fiscal 1996
                                       (see Note 5).

                                **     The Company provided an  adjustment of $2,526,000 to its valuation  allowance for deferred  
                                       tax assets in the fourth quarter of fiscal 1996 (see Note 6).
   
</TABLE>                        




                                                                            F-33
<PAGE>   47


                        Health Management, Inc.
                               and Subsidiaries



---------------------------------------------------------------------------
                                                    Form 10-K Item 14 (d) - 
                                  Consolidated Financial Statement Schedule
                                                             April 30, 1996





                                    Health Management, Inc.
                                           and Subsidiaries


        Index to Consolidated Financial Statements Schedule

---------------------------------------------------------------------------

Report of independent certified public accountants         S-3

Schedule II -- Valuation and qualifying accounts
  and reserves                                             S-4





                                  S-2



<PAGE>   48



Report of Independent Certified Public Accountants
  on Financial Statement Schedule


Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois

The audits referred to in our report dated July 22, 1996, except for
Note 4(a) which is as of July 26, 1996 relating to the consolidated
financial statements of Health Management, Inc. and subsidiaries, which is
contained in Item 8 of this Form 10-K, included the audit of the
accompanying schedule of valuation and qualifying accounts. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.

In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.


/s/ BDO Seidman,LLP
BDO Seidman, LLP


Mitchel Field, New York   

July 22, 1996



                                  S-3


<PAGE>   49



                                 Health Management, Inc. and Subsidiaries

                                  Schedule II -- Valuation and Qualifying
                                                    Accounts and Reserves
<TABLE>
<CAPTION>

                                 Balance at            Additions            
                                Beginning of          Charged to                               Balance at End of
  Classification                    Year               Operations             Deductions             Year
----------------------------------------------------------------------------------------------------------------
<S>                             <C>                   <C>                    <C>               <C>
Allowance for doubtful accounts
  Year ended April 30, 1996     $   7,998,000         $ 14,714,000           $12,642,000       $    10,070,000
===============================================================================================================
  Year ended April 30, 1995     $   2,206,000         $  7,978,000           $ 2,186,000       $     7,998,000
===============================================================================================================
  Year ended April 30, 1994     $     925,000         $  1,781,000           $   500,000       $     2,206,000
===============================================================================================================
</TABLE>




                                  S-4


<PAGE>   50
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                         HEALTH MANAGEMENT, INC.

June 5, 1997             /s/ W. James Nicol
                         -----------------------------------------------------
                         W. James Nicol, Chief Executive Officer and President
                         (Principal Executive Officer)


                               INDEX TO EXHIBITS

         Exhibit                                                          Page
         -------                                                          ----

         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

<PAGE>   51
                  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 referenced to Form 10-K for the year ended April
                  30, 1996).

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

         10.9*    Employment Agreement, dated as of December 18, 1996,
                  between the Company and Paul S. Jurewicz
                  (incorporated by referenced to Form 10-K for the
                  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

<PAGE>   52


                  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 referenced to Form
                  10-K for the 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 referenced to Form 10-K for the
                  year ended April 30, 1996).

         21       Subsidiaries of the Registrant (incorporated by
                  reference to Form 10-K for the year ended April 30,
                  1996).

         23       Consent of BDO Seidman, LLP**

         27       Financial Data Schedule (incorporated by referenced
                  to Form 10-K for the year ended April 30, 1996).

*        Management contract or compensatory plan or arrangement.
**       Filed herewith.