Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549



FORM 10-QSB



QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934





|For the quarter ended: |  | Commission File Number:
|---------------------- |  | -----------------------
|March 31, 2006         |  | 0-27554                



PACE Health Management Systems, Inc.

(Exact name of small business issuer as specified in its charter)



|Iowa                                                           |  | 42-1297992                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



|2116 Financial Center
666 Walnut
Des Moines, IA  50309
|------------------------------------------------------
|(Address and zip code of principal executive offices) 





|(515) 244-5746                                   
|-------------------------------------------------
|(Issuers telephone -number, including area code)



Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject of the filing requirements for at least the
past 90 days. YESx
NOo



Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YESx
NOo



State the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:



|                     | Number of Shares Outstanding
|-------------------- | ----------------------------
|Class                | May 15, 2006                
|Common Stock, no par | 5,716,074                   



Transitional Small Business Disclosure Format (Check one): YESo
NOx

---



PACE HEALTH MANAGEMENT SYSTEMS, INC.



PART I.FINANCIAL INFORMATION



|                                                                   |     
|------------------------------------------------------------------ | ----
|ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                           | Page
|                                                                   |     
|Condensed Balance Sheets                                           |     
|March 31, 2006 and December 31, 2005                               | 3   
|                                                                   |     
|Condensed Statements of Operations                                 |     
|Three Months Ended March 31, 2006 and 2005                         | 4   
|                                                                   |     
|Condensed Statements of Cash Flows                                 |     
|Three Months Ended March 31, 2006 and 2005                         | 5   
|                                                                   |     
|Notes to Condensed Financial Statements                            | 6   
|                                                                   |     
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR  PLAN OF OPERATION | 7   
|                                                                   |     
|ITEM 3. CONTROLS AND PROCEDURES                                    | 8   
|                                                                   |     

PART II.OTHER INFORMATION

|                 |  
|---------------- | -
|ITEM 6. EXHIBITS | 9
|                 |  
|                 |  

2

---

Table of Contents

PART  1. FINANCIAL INFORMATION



ITEM  1. FINANCIAL STATEMENTS



PACE HEALTH MANAGEMENT SYSTEMS, INC.

CONDENSED BALANCE SHEETS (UNAUDITED)



|                                                                 |   | March 31, 2006 |   | December 31, 2005
|---------------------------------------------------------------- | - | -------------- | - | -----------------
|Assets                                                           |   |                |   |                  
|Current Assets                                                   |   |                |   |                  
|Cash and cash equivalents                                        | $ | 1,721,233      | $ | 1,738,958        
|Interest receivable                                              |   | -              |   | 12,386           
|Prepaid expenses                                                 |   | 27,941         |   | 6,257            
|Total current assets                                             | $ | 1,749,174      | $ | 1,757,601        
|                                                                 |   |                |   |                  
|Liabilities and shareholders equity                             |   |                |   |                  
|Current Liabilities                                              |   |                |   |                  
|Accounts payable                                                 | $ | 20,422         | $ | 3,523            
|Accrued expenses                                                 |   | 699            |   | -                
|Total current liabilities                                        |   | 21,121         |   | 3,523            
|                                                                 |   |                |   |                  
|Shareholders equity                                             |   |                |   |                  
|Preferred stock, no par value, authorized 1,000,000 shares:      |   |                |   |                  
|issued none                                                      |   | -              |   | -                
|Convertible participating preferred stock, Series A, no par      |   |                |   |                  
|value; authorized 4,000,000 shares; issued and outstanding       |   |                |   |                  
|2,875,000 shares                                                 |   | 2,875,000      |   | 2,875,000        
|Common stock, no par value; authorized 20,000,000 shares; issued |   |                |   |                  
|and outstanding 5,716,074 shares                                 |   | 17,065,136     |   | 17,065,136       
|Additional paid-in capital                                       |   | 683,486        |   | 683,486          
|Accumulated deficit                                              |   | (18,895,569)   |   | (18,869,544)     
|Total stockholders equity                                       |   | 1,728,053      |   | 1,754,078        
|Total liabilities and stockholders equity                       | $ | 1,749,174      | $ | 1,757,601        
|                                                                 |   |                |   |                  
|See Notes to Condensed Financial Statements                      |   |                |   |                  



3

---

Table of Contents

PACE HEALTH MANAGEMENT SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                             |   | **Three months ended March 31,**
|-------------------------------------------- | - | --------------------------------
|                                            
|                                             |   | 2006                            
|Net revenues                                 | $ | -                               
|Costs and expenses                           |   |                                 
|General and administrative                   |   | 44,732                          
|(Loss) from operations                       |   | (44,732)                        
|Interest income                              |   | 18,707                          
|(Loss) before income taxes                   |   | (26,025)                        
|Provision for income taxes                   |   | -                               
|Net (loss)                                   |   | (26,025)                        
|Preferred dividends in arrears               |   | (71,875)                        
|Net (Loss) available to common shareholders  | $ | (97,900)                        
|(Loss) per share                             |   |                                 
|Basic                                        | $ | (0.02)                          
|Fully diluted                                | $ | (0.02)                          
|Weighted average number of common and common |   |                                 
|equivalent shares outstanding                |   | 5,716,074                       



See Notes to Condensed Financial Statements

4

---

Table of Contents

PACE HEALTH MANAGEMENT SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)





|                                                                |   | Three months ended March 31,
|--------------------------------------------------------------- | - | ----------------------------
|                                                               
|                                                                |   | 2006                        
|Cash flows from operating activities                            |   |                             
|Net (Loss)                                                      | $ | (26,025)                    
|Change in working capital components:                           |   |                             
|(Increase) decrease in prepaid expenses and interest receivable |   | (9,298)                     
|Increase in accounts payable and other current liabilities      |   | 17,598                      
|Net cash (used in) operating activities                         |   | (17,725)                    
|Net (decrease) in cash                                          |   | (17,725)                    
|Cash and cash equivalents                                       |   |                             
|Beginning                                                       |   | 1,738,958                   
|Ending                                                          | $ | 1,721,233                   
|                                                                |   |                             
|See Notes to Condensed Financial Statements                     |   |                             

5

---

Table of Contents

PACE HEALTH MANAGEMENT SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



Note 1. Basis of presentation



The accompanying financial information should be read in conjunction with the annual financial statements and notes thereto for the year ended December 31, 2005. The financial information included herein is unaudited; such information reflects all adjustments, which, in the opinion of management, are necessary in order to make the financial statements not misleading.



The results of operations for the three months are not necessarily indicative of the results to be expected for the entire fiscal year.



Note 2. Stock-based Compensation



Effective January 1, 2006, the Company adopted the provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standard (SFAS) No. 123 (revised), Share-Based Payment
(SFAS 123R) using a modified version of prospective application.
Prior to the adoption of SFAS 123R, the Company accounted for share-based
payments to employees using the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(APB 25). Under the provisions of APB 25, restricted
stock awards were accounted for using variable plan accounting whereby
compensation expense or benefit was recorded each period from the date of grant
to the measurement date based on the fair value of the Companys common
stock at the end of each period. Stock option awards were accounted for using
fixed plan accounting whereby the Company recognized no compensation expense for
stock option awards because the exercise price of options granted was equal to
the fair value of the common stock at the date of grant.



Under the modified prospective application, the provisions of SFAS 123R apply to new awards and to awards outstanding on January 1, 2006 and subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation expense recognized in the first quarter of 2006 includes compensation costs for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.



As a result of all stock-based compensation being fully vested as of December 31, 2005, there is no effect on income before taxes, net income and basic and diluted earnings per share for the three months ended March 31, 2006.



Note 3. Basic and diluted (loss) per share



On January 1, 1997 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which requires the Company to present basic and diluted income (loss) per share amounts. Basic income (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is based on the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of stock options and warrants (using the treasury stock method) and convertible preferred stock (using the if-converted method). The effect of stock options, warrants, and convertible preferred stock was not included in the computation because to do so would have been antidilutive. At March 31, 2006, there were approximately



6

---

Table of Contents

Note 3. Basic and diluted (loss) per share (continued)



750,000 shares issuable under warrant or option arrangements and 10,518,750 shares issuable under conversion of Series A convertible participating preferred stock.



Note 4.  Related Party Transactions



Administration expenses paid to Equity Dynamics, Inc., an entity wholly owned by a Director of the Company, totaled $14,368 and $12,500 for the three months ended March 31, 2006 and 2005.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



General



Prior to October 1998, PACE developed and marketed advanced patient care management software systems that enabled healthcare providers to standardize the delivery of care, maximize resource utilization and improve clinical outcomes. On October 7, 1998, the Company completed the sale of substantially all of its assets to, and the assumption of certain of its liabilities by, Minnesota Mining and Manufacturing Company (the Transaction).



Following the Transaction, the Company has no ongoing operations and no revenues and has minimal operating expenses. The Company presently has no employees. The Companys March 31, 2006 balance sheet reflects current assets of $1,749,174 and current liabilities of $21,121.



The net proceeds from the Transaction will be retained by the Company pending a determination of whether to engage in a follow-on transaction. The Company has been seeking a business combination with another entity, before considering possible liquidation and distribution of its assets. The Company believes that with the cash on hand and net operating loss carryforwards, subject to the limitation of such carryforwards under the Internal Revenue Code, such a combination may be attractive to potential partners and would better serve the interests of the Companys shareholders. As of the date of this Form 10-QSB, no definitive agreement has been signed for a follow-on transaction. If no suitable business combination is identified, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the Company liquidated at the present time, all of the net assets of the Company
would be paid to holders of the Companys preferred stock.



RESULTS OF OPERATIONS



General and administrative:  General and administrative expenses include bookkeeping costs, legal fees, expenses associated with shareholder relations and SEC reporting requirements, and insurance. General and administrative expenses were $44,732 and $26,289 for the three months ended March 31, 2006 and 2005, respectively, representing an increase of 70.2%, due mainly to an increase in auditing and administrative fees.



Interest Income:  Interest income was $18,707 and $6,677 for the three months ended March 31, 2006 and 2005, respectively, representing an increase of 180%. This increase is due mainly to an increase in money market and certificate of deposit interest rates.



Provision for income taxes:No provision for income tax benefit has been recorded due to the Company recording a valuation allowance on the deferred tax assets.

7

---

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



Net cash used in operating activities for the three months ended March 31, 2006 and 2005 was $17,725 and $5,823, respectively. The Company has no ongoing operations and no revenues and has minimal operating expenses. The Companys March 31, 2006 balance sheet reflects current assets of $1,749,174 and current liabilities of $21,121.



The net proceeds from the transaction will be retained by the Company pending a determination of whether to engage in a follow-on transaction. The Company has been seeking a business combination with another entity, before considering possible liquidation and distribution of its assets. As of the date of this Form 10-QSB, no definitive agreement has been signed for a follow-on transaction. If no suitable business combination is identified, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the Company liquidated at the present time, all of the net assets of the Company would be paid to holders of the Companys preferred stock.



ITEM 3. CONTROLS AND PROCEDURES



The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Companys director and acting chief executive and acting financial officer has reviewed and evaluated the Companys disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report (the Evaluation Date). Based on such evaluation, he has concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures are effective in bringing to his attention on a timely basis material information relating to the Company required to be included in the Companys periodic
filings under the Exchange Act.



There have not been any changes in the Companys internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

8

---

Table of Contents

PART II. OTHER INFORMATION



ITEM 6. EXHIBITS



| | 31 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | -- | -----------------------------------------------------------------------

| | 32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | -- | -----------------------------------------------------------------------





SIGNATURES



In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





| | PACE HEALTH MANAGEMENT SYSTEMS, INC.
| | ------------------------------------
| | (Registrant)                        
| |                                     

|             |  |                                                                                            
|------------ |  | -------------------------------------------------------------------------------------------
|May 15, 2006 |  | /s/  John Pappajohn                                                                        
|Dated        |  | John Pappajohn, Director, Acting Chief Executive Officer and Acting Chief Financial Officer

9

---