10-Q

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:
June 30, 2004	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	(IRS Employer Identification Number)
incorporation or organization)

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.
Yes  ü   No

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	August 12, 2004
Common Stock, no par	5,716,074

Transitional Small Business Disclosure Format (Check one):     Yes   No  X .

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PACE HEALTH MANAGEMENT SYSTEMS, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)	Page
Condensed Balance Sheets
June 30, 2004 and December 31, 2003	3
Condensed Statements of Operations
Three Months and Six Months Ended June 30, 2004 and 2003	4
Condensed Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003	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 1. LEGAL PROCEEDINGS	8
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF         EQUITY SECURITIES	8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	9
ITEM 5. OTHER INFORMATION	9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K	9

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)

	June 30, 2004			December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,840,002		$	1,897,678
Accounts receivable		20			20
Prepaid expenses		17,375			9,658
	$	1,857,397		$	1,907,356
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	970		$	992
TOTAL CURRENT LIABILITIES		970			992
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		673,486			673,486
Accumulated deficit		(18,757,195	)		(18,707,258	)
		1,856,427			1,906,364
	$	1,857,397		$	1,907,356

See Notes to Condensed Financial Statements.

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PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
NET REVENUES	$	—		$	—		$	—		$	—
COSTS AND EXPENSES
General and administrative		24,409			27,347			59,137			55,296
		24,409			27,347			59,137			55,296
(Loss) from operations		(24,409	)		(27,347	)		(59,137	)		(55,296	)
INTEREST INCOME		4,567			7,132			9,200			15,425
(Loss) before income taxes		(19,842	)		(20,215	)		(49,937	)		(39,871	)
PROVISION FOR INCOME TAXES		—			—			—			—
Net (Loss)	$	(19,842	)	$	(20,215	)	$	(49,937	)	$	(39,871	)
PREFERRED DIVIDENDS IN ARREARS		(71,875	)		(71,875	)		(143,750	)		(143,750	)
Net (Loss) available to common shareholders	$	(91,717	)	$	(92,090	)	$	(193,687	)	$	(183,621	)
(LOSS) PER SHARE
Basic	$	(0.02	)	$	(0.02	)	$	(0.03	)	$	(0.03	)
Fully diluted	$	(0.02	)	$	(0.02	)	$	(0.03	)	$	(0.03	)
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING		5,716,074			5,716,074			5,716,074			5,716,074

See Notes to Condensed Financial Statements.

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PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six months ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES	2004			2003
Net (Loss)	$	(49,937	)	$	(39,871	)
Change in working capital components:
(Increase) in prepaid expenses and other current assets		(7,717	)		(15,496	)
(Decrease) in accounts payable		(22	)		(1,298	)
Net cash (used in) operating activities		(57,676	)		(56,665	)
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of certificate of deposit		—			1,000,000
Net increase (decrease) in cash and cash equivalents		(57,676	)		943,335
CASH AND CASH EQUIVALENTS
Beginning		1,897,678			987,346
Ending	$	1,840,002		$	1,930,681

See Notes to Condensed Financial Statements.

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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, 2003. 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 six months are not necessarily indicative of the results to be expected for the entire fiscal year.

Note 2. Stock-based Compensation

On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation as amended by SFAS 148, which establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. However, SFAS 123 allows employee compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APBO) No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to continue to apply the intrinsic value based method of accounting for stock-based employee compensation. Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

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 June 30, 2004, there are approximately 70,000 shares issuable under warrant or option arrangements and 9,512,500 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 $12,500 and $13,000 for the three months ended June 30, 2004 and 2003, respectively, and totaled $28,500 and $25,500 for the six months ended June 30, 2004 and 2003, respectively.

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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. The Company’s enterprise-wide, client/server applications automated charting, clinical workflow processes and clinical pathways. The Company’s core system, PACE CMS, was a modular suite of advanced software applications that provided hospitals, physicians’ offices, and integrated delivery systems a comprehensive system for interdisciplinary documentation, nursing care planning, clinical pathway management and enterprise-wide order management, all at the point of care.

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 (“3M”) (“the Transaction”). The sale was made pursuant to an Asset Purchase Agreement dated June 30, 1998, as amended, as described in Company’s definitive proxy statement dated September 14, 1998. The Transaction was approved by the holders of both the common stock and the preferred stock at a special meeting of shareholders held on October 7, 1998.

The purchase price of the Transaction was approximately $5.9 million, including $4.75 million in cash, of which $750,000 was originally placed in escrow to secure the Company’s indemnification obligations under the Asset Purchase Agreement, plus the assumption of substantially all of the Company’s liabilities other than $2.1 million in line of credit balances, which were paid off from proceeds at closing. 3M offered positions to most of the Company’s employees and assumed full support of the Company’s customers. Subsequent to the closing of the Transaction, the Company agreed that $25,000 of the amount in escrow could be paid to 3M as part of a purchase price adjustment contemplated by the Asset Purchase Agreement, leaving an escrow balance of $725,000.

In July 1999, the Company received proceeds from the restricted escrow account totaling approximately $525,000. In December 2000, the Company received final proceeds from the restricted escrow account totaling $104,953. A like amount was also paid to 3M in final settlement and as an adjustment to the purchase price.

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 June 30, 2004 balance sheet reflects cash and cash equivalents of approximately $1.8 million and no material liabilities.

The net proceeds from the sale 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 within a reasonable period of time, 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 $24,409 and $27,347 for the three months ended June 30, 2004 and 2003, respectively, representing a decrease of 10.7%. General and administrative expenses were $59,137 and $55,296 for the six months ended June 30, 2004 and 2003, respectively, representing an increase of 6.9%, due mainly to an increase in audit and administrative fees.

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Interest Income: Interest income was $4,567 and $7,132 for the three months ended June 30, 2004 and 2003, respectively, representing a decrease of 36.0%. Interest income was $9,200 and $15,425 for the six months ended June 30, 2004 and 2003, respectively, representing a decrease of 40.4%. These decreases are due mainly to a decrease in the total cash, cash equivalents and certificate of deposits from the prior year.

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.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the six months ended June 30, 2004 and 2003 was $57,676 and $56,665, respectively. Following the Transaction, the Company has no ongoing operations and no revenues and has minimal operating expenses. The Company’s June 30, 2004 balance sheet reflects cash and cash equivalents of approximately $1.8 million and no material liabilities.

The net proceeds from the sale 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 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      N/A

ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

      N/A

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

      N/A

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

      N/A

ITEM 5. OTHER INFORMATION.

      N/A

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
      (a)  Exhibits

31.1         Section 302 Certification by Director and Acting Chief Executive Officer

31.2         Section 302 Certification by Director and Acting Chief Financial Officer

32.1         Section 906 Certification by Director and Acting Chief Executive Officer

32.2         Section 906 Certification by Director and Acting Chief Financial Officer

      (b)  Reports on Form 8-K
                   No reports on Form 8-K were filed during the quarter for which this report is filed.

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)

August 12, 2004	/s/ John Pappajohn
Dated	John Pappajohn, Director

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, John Pappajohn, certify that:

1) I have reviewed this quarterly report on Form 10-QSB of PACE Health Management Systems;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   August 12, 2004

/s/   John Pappajohn

John Pappajohn
Director and Acting CEO

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EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, John Pappajohn, certify that:

1) I have reviewed this quarterly report on Form 10-QSB of PACE Health Management Systems;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   August 12, 2004

/s/   John Pappajohn

John Pappajohn
Director and Acting CFO

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PACE Health Management Systems, Inc. (the “Company”) on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Pappajohn, Director and Acting Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)         The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)         The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/   John Pappajohn

John Pappajohn
Director and Acting CEO
August 12, 2004

A signed original of this written statement required by Section 906 has been provided to and will be retained by PACE Health Management Systems, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.

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EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PACE Health Management Systems, Inc. (the “Company”) on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Pappajohn, Director and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)         The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)         The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/   John Pappajohn

John Pappajohn
Director and Acting CFO
August 12, 2004

        A signed original of this written statement required by Section 906 has been provided to and will be retained by PACE Health Management Systems, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.

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