Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**                                                                                                                                                                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                        |
| **For the quarterly period ended  June 30, 2009**                                                                                                                                            |
| ** **                                                                                                                                                                                        |
| **or**                                                                                                                                                                                            |
| ** **                                                                                                                                                                                        |
| **o**                                                                                                                                                                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
| ** **                                                                                                                                                                                        |
| **For the transition period  from             to             ** |

 

**COMMISSIONFILE NUMBER 000-25959**

 

**GOLDLEAFFINANCIAL SOLUTIONS, INC.**

(Exact name of Registrant asspecified in its charter)

 

| **TENNESSEE**                            | ** ** | **62-1453841**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of          | ** ** | (I.R.S. Employer Identification No.) |
| incorporation or organization)           | ** ** | ** **                           |
| ** **                               | ** ** | ** **                           |
| **350 TECHNOLOGY BLVD.; SUITE 200**      | ** ** |                                 |
| **NORCROSS, GEORGIA**                    | ** ** | **30071**                            |
| (Address of principal executive offices) | ** ** | (Zip Code)                           |

 

**(678) 966-0844**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to the filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer; or asmaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o      |   | Accelerated filer o              |
|-----------------------------------------------|--------|--------------------------------------------|
|                                          |   |                                       |
| Non-accelerated filer o             |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                                       |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

 

On August 10, 2009; 19,463,238 shares of the Registrant’sno par value Common Stock were outstanding.

 

 

 

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Table ofContents

 

**TABLE OFCONTENTS**

 
| **PART I – FINANCIAL INFORMATION**                                                              |   |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |
| Item 1. Financial Statements.                                                                        |   |
|                                                                                                      |   |
| Consolidated  Balance Sheets                                                                              | 3      |
|                                                                                                      |   |
| Consolidated  Statements of Operations for the three months ended June 30, 2009 and  2008            | 4      |
|                                                                                                      |   |
| Consolidated  Statements of Operations for the six months ended June 30, 2009 and 2008               | 5      |
|                                                                                                      |   |
| Consolidated  Statements of Cash Flows                                                                    | 6      |
|                                                                                                      |   |
| Notes to Consolidated Financial Statements                                                                | 8      |
|                                                                                                      |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations. | 16     |
|                                                                                                      |   |
| Item 4T. Controls and Procedures.                                                                    | 27     |
|                                                                                                      |   |
| **PART II  – OTHER INFORMATION**                                                                |   |
|                                                                                                      |   |
| Item 1A. Risk Factors.                                                                               | 28     |
|                                                                                                      |   |
| Item 4. Submission of Matters to a Vote of Security  Holders.                                             | 29     |
|                                                                                                      |   |
| Item 6.  Exhibits.                                                                                   | 30     |
|                                                                                                      |   |
| **SIGNATURES**                                                                                            | 31     |
|                                                                                                      |   |
| Ex-2.1 Agreement and Plan of Merger                                                                       |   |
|                                                                                                      |   |
| Ex-10.1 Amended and Restated 2005 Long-Term Equity Incentive Plan                                         |   |
|                                                                                                      |   |
| Ex-10.2 Fourth Amendment to Credit Agreement                                                              |   |
|                                                                                                      |   |
| Ex-10.3 Payment Waiver Agreement                                                                          |   |
|                                                                                                      |   |
| Ex-10.4 First Amendment to our Change in Control                                                          |   |
|                                                                                                      |   |
| Ex-31.1 Section 302 Certification of the CEO                                                         |   |
|                                                                                                      |   |
| Ex-31.2 Section 302 Certification of the CFO                                                         |   |
|                                                                                                      |   |
| Ex-32.1 Section 906 Certification of the CEO                                                         |   |
|                                                                                                      |   |
| Ex-32.2 Sections 906 Certification of the CFO                                                        |   |

 

 

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**PART I – FINANCIAL INFORMATION**

 

**GOLDLEAF FINANCIAL SOLUTIONS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

 
| ** **                                                                                                                          | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                          |       |              |       |                  |       |
| Current assets:                                                                                                                     |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                           |       | $                 | 1,483      |                  | $          | 5,292 |   |
| Restricted cash                                                                                                                     |       | 39                |       | 1,312                 |       |
| Trade accounts receivable, net                                                                                                      |       | 8,250             |       | 12,238                |       |
| Inventory                                                                                                                           |       | 638               |       | 1,159                 |       |
| Investment in direct financing leases                                                                                               |       | 1,621             |       | 1,755                 |       |
| Prepaids and other current assets                                                                                                   |       | 2,119             |       | 2,063                 |       |
| Total current assets                                                                                                                |       | 14,150            |       | 23,819                |       |
|                                                                                                                                |       |              |       |                  |       |
| Property and equipment, net                                                                                                         |       | 3,897             |       | 4,313                 |       |
| Operating lease equipment, net                                                                                                      |       | 4                 |       | 11                    |       |
| Software development costs, net                                                                                                     |       | 8,448             |       | 7,289                 |       |
| Investment in direct financing leases,  net of current portion                                                                      |       | 2,685             |       | 2,907                 |       |
| Intangibles and other assets, net                                                                                                   |       | 31,022            |       | 33,064                |       |
| Goodwill                                                                                                                            |       | 24,468            |       | 24,468                |       |
| Total assets                                                                                                                        |       | $                 | 84,674     |                  | $          | 95,871 |   |
|                                                                                                                                |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                            |       |              |       |                  |       |
| Current liabilities:                                                                                                                |       |              |       |                  |       |
| Revolving line of credit                                                                                                            |       | $                 | 35,500     |                  | $          | — |   |
| Accounts payable                                                                                                                    |       | 3,410             |       | 3,298                 |       |
| Accrued liabilities                                                                                                                 |       | 3,554             |       | 4,969                 |       |
| Deferred revenue                                                                                                                    |       | 11,082            |       | 13,946                |       |
| Customer deposits                                                                                                                   |       | 2,249             |       | 3,526                 |       |
| Capital lease obligations                                                                                                           |       | 342               |       | 403                   |       |
| Non-recourse lease notes payable                                                                                                    |       | 1,445             |       | 1,702                 |       |
| Current portion of long term debt                                                                                                   |       | 220               |       | 216                   |       |
| Convertible notes payable                                                                                                           |       | 7,000             |       | —                |       |
| Other current liabilities                                                                                                           |       | 249               |       | 405                   |       |
| Total current liabilities                                                                                                           |       | 65,051            |       | 28,465                |       |
|                                                                                                                                |       |              |       |                  |       |
| Revolving line of credit                                                                                                            |       | —            |       | 37,500                |       |
| Deferred revenue, net of current portion                                                                                            |       | 342               |       | 480                   |       |
| Capital lease obligation, net of current  portion                                                                                   |       | —            |       | 141                   |       |
| Non-recourse lease notes payable, net of  current portion                                                                           |       | 2,536             |       | 2,583                 |       |
| Long term debt, net of current portion                                                                                              |       | 178               |       | 289                   |       |
| Convertible notes payable                                                                                                           |       | —            |       | 7,000                 |       |
| Deferred income taxes, net of current  portion                                                                                      |       | 3,527             |       | 3,527                 |       |
| Other non-current liabilities                                                                                                       |       | 802               |       | 690                   |       |
| Total liabilities                                                                                                                   |       | 72,436            |       | 80,675                |       |
|                                                                                                                                |       |              |       |                  |       |
| Commitments and contingencies                                                                                                       |       |              |       |                  |       |
| Stockholders' equity:                                                                                                               |       |              |       |                  |       |
| Common stock, no par value; 100,000,000  shares authorized; shares issued and outstanding, 19,443,784 and 19,168,784,  respectively |       | —            |       | —                |       |
| Preferred stock, no par value;  20,000,000 shares authorized, no shares outstanding                                                 |       | —            |       | —                |       |
| Additional paid-in capital                                                                                                          |       | 73,959            |       | 73,402                |       |
| Accumulated deficit                                                                                                                 |       | (61,721           | )          | (58,206               | )          |
| Total stockholders' equity                                                                                                          |       | 12,238            |       | 15,196                |       |
| Total liabilities and stockholders'  equity                                                                                         |       | $                 | 84,674     |                  | $          | 95,871 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**GOLDLEAF FINANCIAL SOLUTIONS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the three months ended June 30, 2009 and2008**

**(in thousands, except per share data)**

 
| ** **                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
|--------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                           | ** ** | **(unaudited)** | ** ** |
| Revenues:                            |       |            |       |     |       |
| Financial institution services       |       | $               | 13,776     |     | $          | 17,510 |   |
| Retail inventory management services |       | 1,500           |       | 1,974    |       |
| Other products and services          |       | 1,009           |       | 1,005    |       |
| Total revenues                       |       | 16,285          |       | 20,489   |       |
|                                 |       |            |       |     |       |
| Cost of Revenues:                    |       |            |       |     |       |
| Financial institution services       |       | 4,042           |       | 4,151    |       |
| Retail inventory management services |       | 197             |       | 215      |       |
| Other products and services          |       | 698             |       | 601      |       |
| Gross profit                         |       | 11,348          |       | 15,522   |       |
|                                 |       |            |       |     |       |
| Operating Expenses:                  |       |            |       |     |       |
| General and administrative           |       | 5,184           |       | 6,404    |       |
| Selling and marketing                |       | 4,221           |       | 5,027    |       |
| Research and development             |       | 2,028           |       | 1,646    |       |
| Amortization                         |       | 929             |       | 1,409    |       |
| Other operating (income) expenses    |       | (63             | )          | 24       |       |
| Total operating expenses             |       | 12,299          |       | 14,510   |       |
| Operating (loss) income              |       | (951            | )          | 1,012    |       |
|                                 |       |            |       |     |       |
| Interest expense, net                |       | 485             |       | 461      |       |
|                                 |       |            |       |     |       |
| (Loss) income before income taxes    |       | (1,436          | )          | 551      |       |
|                                 |       |            |       |     |       |
| Income tax provision                 |       | 65              |       | 229      |       |
|                                 |       |            |       |     |       |
| Net (loss) income                    |       | $               | (1,501     | )        | $          | 322 |   |
|                                 |       |            |       |     |       |
| (Loss) income per share:             |       |            |       |     |       |
| Basic                                |       | $               | (0.08      | )        | $          | 0.02 |   |
| Diluted                              |       | $               | (0.08      | )        | $          | 0.02 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**GOLDLEAF FINANCIAL SOLUTIONS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the six months ended June 30, 2009 and2008**

**(in thousands, except per share data)**

 
| ** **                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
|--------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                           | ** ** | **(unaudited)** | ** ** |
| Revenues:                            |       |            |       |     |       |
| Financial institution services       |       | $               | 28,813     |     | $          | 33,879 |   |
| Retail inventory management services |       | 3,112           |       | 3,951    |       |
| Other products and services          |       | 2,706           |       | 1,854    |       |
| Total revenues                       |       | 34,631          |       | 39,684   |       |
|                                 |       |            |       |     |       |
| Cost of Revenues:                    |       |            |       |     |       |
| Financial institution services       |       | 8,427           |       | 7,891    |       |
| Retail inventory management services |       | 408             |       | 447      |       |
| Other products and services          |       | 1,942           |       | 1,097    |       |
| Gross profit                         |       | 23,854          |       | 30,249   |       |
|                                 |       |            |       |     |       |
| Operating Expenses:                  |       |            |       |     |       |
| General and administrative           |       | 10,864          |       | 12,673   |       |
| Selling and marketing                |       | 9,044           |       | 10,410   |       |
| Research and development             |       | 4,178           |       | 3,502    |       |
| Amortization                         |       | 1,894           |       | 2,595    |       |
| Other operating expenses             |       | 270             |       | 40       |       |
| Total operating expenses             |       | 26,250          |       | 29,220   |       |
| Operating (loss) income              |       | (2,396          | )          | 1,029    |       |
|                                 |       |            |       |     |       |
| Interest expense, net                |       | 1,025           |       | 1,380    |       |
|                                 |       |            |       |     |       |
| Loss before income taxes             |       | (3,421          | )          | (351     | )          |
|                                 |       |            |       |     |       |
| Income tax provision (benefit)       |       | 94              |       | (160     | )          |
|                                 |       |            |       |     |       |
| Net loss                             |       | $               | (3,515     | )        | $          | (191 | ) |
|                                 |       |            |       |     |       |
| Loss per share:                      |       |            |       |     |       |
| Basic                                |       | $               | (0.18      | )        | $          | (0.01 | ) |
| Diluted                              |       | $               | (0.18      | )        | $          | (0.01 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**GOLDLEAF FINANCIAL SOLUTIONS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the six months ended June 30, 2009 and2008**

**(in thousands)**

 

 
| ** **                                                                               | ** ** | **2009**        | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                               | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                                    |       |            |       |     |       |
| Net loss                                                                                 |       | $               | (3,515     | )        | $          | (191 | ) |
|                                                                                     |       |            |       |     |       |
| Adjustments to reconcile net loss to net  cash provided by operating activities:         |       |            |       |     |       |
| Depreciation and amortization                                                            |       | 3,684           |       | 4,279    |       |
| Depreciation on operating lease  equipment                                               |       | 5               |       | 6        |       |
| Deferred income taxes                                                                    |       | —          |       | (162     | )          |
| Amortization of debt issuance cost and  discount                                         |       | 110             |       | 91       |       |
| Stock compensation expense                                                               |       | 557             |       | 416      |       |
| Amortization of lease income and initial  direct costs                                   |       | (242            | )          | (292     | )          |
| Loss on write-down or disposal of  property and equipment and software development costs |       | 6               |       | 22       |       |
| Deferred gain on land sale                                                               |       | (8              | )          | (8       | )          |
| Gain on sale of leased equipment                                                         |       | —          |       | (10      | )          |
| Unrealized gain on interest rate swap                                                    |       | (156            | )          | (36      | )          |
| Loss on sale of core processing and  WinTELLER assets                                    |       | 20              |       | —   |       |
| Changes in assets and liabilities:                                                       |       |            |       |     |       |
| Restricted cash and customer deposits                                                    |       | (4              | )          | 2,270    |       |
| Trade accounts receivable                                                                |       | 3,988           |       | (122     | )          |
| Inventory                                                                                |       | 521             |       | (306     | )          |
| Prepaids and other current assets                                                        |       | (42             | )          | (37      | )          |
| Other non-current assets                                                                 |       | 63              |       | —   |       |
| Accounts payable                                                                         |       | 109             |       | (228     | )          |
| Accrued liabilities                                                                      |       | (1,413          | )          | 1,129    |       |
| Deferred revenue                                                                         |       | (2,989          | )          | (396     | )          |
| Other non-current liabilities                                                            |       | 118             |       | (58      | )          |
| Net cash provided by operating  activities                                               |       | 812             |       | 6,367    |       |
|                                                                                     |       |            |       |     |       |
| Cash flows from investing activities:                                                    |       |            |       |     |       |
| Acquisition of Alogent, net of cash  acquired                                            |       | —          |       | (32,999  | )          |
| Acquisition of businesses, net of cash  acquired                                         |       | —          |       | (25      | )          |
| Proceeds from lease termination                                                          |       | 2               |       | 10       |       |
| Investment in direct financing leases                                                    |       | (315            | )          | (201     | )          |
| Lease receivables collected                                                              |       | 913             |       | 862      |       |
| Additions to property and equipment                                                      |       | (560            | )          | (1,395   | )          |
| Software development costs                                                               |       | (1,821          | )          | (1,537   | )          |
| Additions to intangibles and other  assets                                               |       | (227            | )          | (280     | )          |
| Proceeds from sale of property and  equipment                                            |       | —          |       | 18       |       |
| Net cash used in investing activities                                                    |       | (2,008          | )          | (35,547  | )          |
|                                                                                          |            |                 |            |          |            |  |  |

 

-  Continued  -

The accompanying notes arean integral part of these consolidated financial statements.

 

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**GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

**For the six months ended June 30, 2009 and2008**

**(in thousands)**

 
| ** **                                                                                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                           | ** ** | **(unaudited)** | ** ** |
| Cash flows from financing activities:                                                                |       |            |       |     |       |
| Proceeds from line of credit                                                                         |       | 1,000           |       | 33,500   |       |
| Payments on line of credit                                                                           |       | (3,000          | )          | (1,000   | )          |
| Payments on capital lease obligation                                                                 |       | (202            | )          | (208     | )          |
| Proceeds from non-recourse lease note  payable                                                       |       | 626             |       | 683      |       |
| Payments of non-recourse lease note  payable                                                         |       | (930            | )          | (940     | )          |
| Payment of long term debt                                                                            |       | (107            | )          | —   |       |
| Net cash (used in) provided by financing  activities                                                 |       | (2,613          | )          | 32,035   |       |
|                                                                                                 |       |            |       |     |       |
| Net change in cash and cash equivalents                                                              |       | (3,809          | )          | 2,855    |       |
|                                                                                                 |       |            |       |     |       |
| Cash and cash equivalents at the  beginning of period                                                |       | 5,292           |       | 2,648    |       |
| Cash and cash equivalents at the end of  period                                                      |       | $               | 1,483      |     | $          | 5,503 |   |
|                                                                                                 |       |            |       |     |       |
| Supplemental non-cash information:                                                                   |       |            |       |     |       |
| Issuance of additional 1,889,469 common  shares as purchase consideration in the Alogent acquisition |       | $               | —     |     | $          | 2,638 |   |
| Issuance of convertible note payable as  purchase consideration in the Alogent acquisition           |       | $               | —     |     | $          | 7,000 |   |
| Purchase of software licenses through  issuance of long-term debt                                    |       | $               | —     |     | $          | 462 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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**GOLDLEAFFINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1. Organization and Basis ofPresentation**

 

GoldleafFinancial Solutions, Inc. (“Goldleaf” or the “Company”) offers a strategicsuite of integrated technology and payment processing solutions to financialinstitutions of all sizes. Goldleaf’s products and services enable financialinstitutions to succeed in today’s competitive market, solidify their trustedfinancial relationships, expand their presence, and improve profitabilitythrough the efficient use of technology.

 

Wegenerate revenue from the following three main sources:

 

·                  Financial institution services,which include:

 

·                  Payment solutions, and

 

·                  Lending solutions

 

·                  Retail inventory managementservices; and

 

·                  Other products and services

 

Theaccompanying consolidated financial statements are unaudited and include theaccounts of Goldleaf Financial Solutions, Inc. and its wholly ownedsubsidiaries. All intercompany transactions and accounts have beeneliminated.  The Company operates in tworeportable segments, financial institution services and retail inventorymanagement services.

 

Inthe opinion of management, all adjustments, normal and recurring in nature,necessary for the fair presentation of the consolidated financial statementshave been included. Additionally, certain amounts reported in prior periodshave been reclassed to conform to current presentation.

 

Interimresults are not necessarily indicative of results for the full year.  The consolidated financial statements havebeen prepared in accordance with United States generally accepted accountingprinciples for interim financial reporting, and with the instructions of Form 10-Qand Article 10 of Regulation S-X and accordingly they do not include allthe information and footnotes required in the annual consolidated financialstatements and accompanying footnotes. These consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-K for the year ended December 31,2008.

 

Oursignificant accounting policies include revenue recognition, softwaredevelopment, income taxes, acquisition accounting, accounting for long-livedassets, intangibles assets, and goodwill. Please refer to our critical accounting policies as described in ourannual financial statements in our Annual Report on Form 10-K for the yearended December 31, 2008 for a more detailed description of theseaccounting policies.

 

**2. Recent Accounting Pronouncements**

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (“SFAS 141(R)”),which replaces SFAS No. 141, *BusinessCombinations.* SFAS 141(R) generally retains the underlyingconcepts of SFAS 141 because it requires all business combinations to beaccounted for at fair value under the acquisition method of accounting, but itchanges how the acquisition method of accounting is applied in a number ofsignificant aspects. Acquisition costs will be expensed as incurred; contingentconsideration will be recorded at fair value on the date of acquisition;restructuring costs associated with a business combination will be expensedsubsequent to the acquisition date; and changes in deferred tax asset valuationallowances and income tax uncertainties after the acquisition date will affectthe income tax provision. SFAS 141(R) is effective on a prospectivebasis for all of the Company’s business combinations with an acquisition dateon or after January 1, 2009, with the exception of the accounting forvaluation allowances on deferred taxes and acquired tax contingencies. Weadopted SFAS 141(R) and concluded it had no material impact on ourconsolidated financial statements.

 

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InMarch 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities (anamendment of FASB Statement No. 133)* (“SFAS 161”), whichrequires enhanced disclosures for derivative and hedging activities.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. Early application isencouraged. We adopted SFAS 161, which became effective January 1,2009, and the required disclosures have been included in Note 9. “Derivative”,to the consolidated financial statements.

 

InApril 2008, the FASB issued Staff Position No. FAS 142-3, *The Determination of the Useful Life of IntangibleAssets* (“FSP 142-3”), which amends the factors that should beconsidered in developing renewal or extension assumptions used to determineuseful life of a recognized intangible asset under SFAS No. 142, *Goodwill and Other Intangible Assets*(“SFAS 142”). Theintent is to improve the consistency between the useful life of a recognizedintangible asset under SFAS 142 and the period of expected cash flows usedto measure the fair value of the asset under SFAS 141(R), and other U.S.generally accepted accounting principles. We adopted FSP 142-3, which becameeffective January 1, 2009, and concluded it had no material impact on ourconsolidated financial statements.

 

InApril 2009, the FASB issued Staff Position No. 107-1, *Interim Disclosures About Fair Value of Financial Instruments*(“FSP107-1”).  FSP 107-1 extends thedisclosure requirements of SFAS No. 107, *Disclosuresabout Fair Value of Financial Instruments,* to interim financialstatements of publicly traded companies. FSP 107-1 requires disclosures of the fair value of all financialinstruments, with the exception of a few, that must be presented together withthe carrying value of the financial instruments in a manner that clearlydistinguishes between assets and liabilities and indicates where the amountsare reported on the balance sheet.  Italso requires disclosure on the methods and significant assumptions used to estimatefair value.  We have adopted FSP 107-1,which became effective in our interim reporting for the three months ended June 30,2009, and the required disclosures have been included in Note 8. “Fair ValueMeasurements”.

 

InMay 2009, the FASB issued SFAS No. 165, *SubsequentEvents* (“SFAS 165”).  SFAS 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.  SFAS 165requires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date, that is, whether the daterepresents the date the financial statements were issued or were available tobe issued.  We have adopted SFAS 165,which became effective for the first interim period ending after June 15,2009, and the required disclosures have been included in Note 11. “SubsequentEvents”.

 

InJune 2009, the FASB issued SFAS No. 168, *The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting*, (“SFAS 168”). SFAS 168 represents the last numbered standard to be issued by FASBunder the old, or pre-codification numbering system, and amends the GAAPhierarchy established under SFAS 162.  OnJuly 1, 2009, the FASB launched FASB’s new Codification entitled *The FASB Accounting Standards Codification.*  The Codification will supersede all existingnon-SEC accounting and reporting standards. SFAS 168 is effective in the first interim and annual periods endingafter September 15, 2009.  Thispronouncement will have no effect on our financial statements upon adoptionother than current references to GAAP which will be replaced with references tothe applicable codification paragraph.

 

**3. Commitments and Contingencies**

 

*Revolving Line of Credit and Long-Term Debt*

 

OnAugust 14, 2009, we executed a Fourth Amendment and Waiver (the “FourthAmendment”)  to our Second Amended andRestated Credit Agreement with Bank of America, N.A., Wachovia Bank, N.A., andThe People’s Bank of Winder, dated November 30, 2006, as amended on January 17,2008, December 24, 2008, and February 18, 2009.

 

Pursuantto the Fourth Amendment, Bank of America, N.A., as Agent, waived the Company’snon-compliance with the debt to EBITDA ratio as of June 30, 2009.  The Company also agreed that it would notborrow in excess of $40.0 million under the credit facility until such time asthe Company was back in compliance with the funded debt to EBITDA ratio.  Furthermore, beginning September 1,2009, the pricing of the credit facility will change so that the Company willbegin paying a rate of 4.75% per annum over LIBOR for LIBOR loans and lettersof credit, a rate of 3.75% per annum over the bank’s Base Rate for Base Rate loansinstead of rates based on a sliding scale. In addition, the lending group will now charge a 0.75% commitment fee onthe unused portion of the Company’s $45.0 million debt facility.  These changes will remain in effect until theCompany is back in compliance with the debt to EBITDA ratio.  Bank of America, as agent under the creditfacility, charged a 25 basis point fee for the amendment.

 

Therevolving line of credit is classified as a current liability as of June 30,2009, compared to a long term liability as of December 31, 2008, as thematurity date of the credit agreement, which is January 15, 2010, causesthis liability to be due in less than one year from the balance sheetdate.  As of June 30, 2009 and December 31,2008 we owed $35.5 million and $37.5 million, respectively, on therevolving line of credit.   We were incompliance with all restrictive non-financial covenants and all but onefinancial covenant (the funded debt to EBITDA) as of June 30, 2009.

 

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Thematerial terms of the syndicated credit facility are as follows:

 

·                  the revolving loancommitment is $45.0 million, yet we have agreed to only borrow $40.0million until such time as we are back in compliance with the funded debt toEBITDA ratio;

 

·                  the limit on annual capitalexpenditures is $7.0 million;

 

·                  4.75% per annum over LIBORfor LIBOR loans and letters of credit, 3.75% per annum over the banks’ BaseRate for Base Rate loans, along with a 0.75% commitment fee for the unusedportion of the credit facility up to $40.0 million;

 

·                  the funded debt to EBITDAratio (as defined) is 3.0;

 

·                  the senior funded debt toEBITDA ratio (as defined) is 3.0; and

 

·                  the Company is to maintain afixed charge coverage ratio (as defined) of not less than 2:1.

 

TheCompany executed convertible notes of $7.0 million delivered to the Alogentshareholders on January 17, 2008, having a 24 month term and a 7.0%annual interest rate payable quarterly in arrears. The principal under thenotes is convertible, at the option of the holder, into shares of our commonstock at a conversion price of $4.50 per share.   These notes have a maturity date of January 17,2010 and are classified as a current liability as of June 30, 2009compared to a long-term liability as of December 31, 2008.

 

Ifthe Company is unable to complete the proposed merger with Jack Henry &Associates, Inc., it would need to refinance its debt. The Company’s ability tocontinue as a going concern would be contingent upon its ability to securefinancing. There can be no assurances that refinancing would be available tothe Company at all or on favorable terms.

 

*Legal Proceedings*

 

Weare not currently a party to, and none of our material properties is currentlysubject to, any material litigation other than routine litigation incidental toour business.

 

*Employment Agreements*

 

TheCompany has entered into employment agreements, severance agreements and changeof control agreements with certain executive officers and employees of theCompany, most of which the Company acquired through its various acquisitions.These agreements provide for compensation to the individuals in the form ofannual base salaries and, occasionally, bonuses. As of June 30, 2009, theCompany had six employment agreements, four severance agreements, and eightchange of control agreements. The employment agreements provide for severancebenefits, ranging up to 24 months, upon the occurrence of certain events,including a change in control, as defined in the individual agreements. Theseverance agreements provide for severance benefits ranging from two to sixmonths, depending on the circumstances under which the employee separates fromthe Company. The change in control agreements provide for severance benefitsranging from six to 12 months if the individual’s employment terminatesfollowing a change of control.

 

Seealso Note 11. Subsequent Events that discusses amendments to employment andchange in control agreements.

 

*Earn out Agreements*

 

In our May 2007 asset purchase agreement with Data Trade, weagreed to a twenty-four month earn out following the acquisition date based onEBITDA targets. In 2008, we paid $2.2 million of this earn out liabilityfor the first twelve months of the earn out period. The EBITDA target was notmet for the second twelve month period ending April 30, 2009 and,therefore, we do not owe additional funds to the shareholders related to theasset purchase agreement.

 

**4. Comprehensive Loss**

 

Comprehensiveincome (loss) for the three and six months ended June 30, 2009 and 2008was, in each case, comprised solely of net income (loss).

 

**5. Net Income (Loss) per Share**

 

Basicincome or loss per share is computed by dividing net income or loss availableto common stockholders by the weighted average number of common sharesoutstanding during the year. Diluted income per share is computed by dividingnet income or loss available to common stockholders by the weighted averagenumber of dilutive common and common equivalent shares outstanding during thefiscal year, which includes the additional dilution related to conversion ofstock options as computed under the treasury stock method.

 

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Thefollowing table is a reconciliation of the Company’s basic and diluted loss orincome per share in accordance with SFAS No. 128 (in thousands, except pershare data):

 
| ** **                                 | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                       |       |                             |       |                           |       |   |   |   |   |
| Net (loss) income                          |       | $                                | (1,501     | )                              | $          | 322 |   | $ | (3,515 | ) | $ | (191 | ) |
|                                       |       |                             |       |                           |       |   |   |   |   |
| Basic (loss) income per share:             |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares outstanding |       | 19,404                           |       | 19,169                         |       | 19,286 |   | 18,992 |   |
| Basic (loss) income per share         |       | $                                | (0.08      | )                              | $          | 0.02 |   | $ | (0.18 | ) | $ | (0.01 | ) |
| Diluted (loss) income per share:           |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares outstanding |       | 19,404                           |       | 19,169                         |       | 19,286 |   | 18,992 |   |
| Dilutive common share equivalents          |       | —                           |       | —                         |       | — |   | — |   |
| Total diluted shares outstanding           |       | 19,404                           |       | 19,169                         |       | 19,286 |   | 18,992 |   |
| Diluted (loss) income per share       |       | $                                | (0.08      | )                              | $          | 0.02 |   | $ | (0.18 | ) | $ | (0.01 | ) |

 

Allemployee stock options and contingently issuable common shares were excludedfrom diluted loss per share for the three and six months ended June 30,2009 and 2008 as the effect would be anti-dilutive.

 

**6. Income Taxes**

 

Theeffective tax rates for the three and six months ended June 30, 2009 were(4.5%) and (2.7%) compared to 41.6% and 45.6% for the three and six monthsended June 30, 2008.   For the threemonths ended June 30, 2009, tax expense totaled $65,000 and consisted offederal and state income tax benefit of approximately $0.5 million offset byforeign income tax expense of approximately $65,000, and a valuation allowanceof $0.5 million. For the six months ended June 30, 2009, tax expensetotaled $94,000 and consisted of federal and state income tax benefit ofapproximately $1.2 million offset by foreign income tax expense ofapproximately $94,000, and a valuation allowance of $1.2 million.  For the three and six months ended June 30,2008, tax expense (benefit) totaled $0.2 million and ($0.2) million, respectively.  The primary reason for the difference betweenthe effective tax rates period-over-period is due to the Company’s valuationallowance that was recorded against deferred tax assets for the three and sixmonths ended June 30, 2009.

 

Asof June 30, 2009 and December 31, 2008, the Company believed that itis more likely than not that the Company will not be able to generatesufficient taxable income in future years in order to realize the deferred taxassets that are recorded, with certain exceptions. As such a valuationallowance of $5.9 million and $4.7 million has been provided againstthe Company’s federal and state deferred tax assets as of June 30, 2009and December 31, 2008, respectively.

 

**7. Stock Compensation**

 

Asof June 30, 2009, there was $1.5 million of unrecognized totalcompensation cost related to unvested share-based compensationarrangements.  We expect to recognizethis cost over a weighted-average period of approximately 1.8 years.

 

**8. Fair Value Measurements**

 

EffectiveJanuary 1, 2008, we adopted SFAS No. 157, *Fair Value Measurements* (“SFAS 157”), as it applies toour financial instruments.  SFAS 157defines fair value, outlines a framework for measuring fair value, and detailsthe required disclosures about fair value measurements.

 

UnderSFAS 157, fair value is defined as the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date in the principal or mostadvantageous market. SFAS 157 establishes a hierarchy in determining thefair value of an asset or liability. The fair value hierarchy has three levelsof inputs, both observable and unobservable. Level 1 inputs include quotedmarket prices in an active market for identical assets or liabilities.Level 2 inputs are market data, other than Level 1, that areobservable either directly or indirectly. Level 2 inputs include quotedmarket prices for similar assets or liabilities, quoted market prices in aninactive market, and other observable information that can be corroborated bymarket data. Level 3 inputs are unobservable and corroborated by little orno market data.

 

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Thefollowing table provides information on the assets and liabilities we measureat fair value on a recurring basis (in thousands).

 
| ** **                                           | ** ** | **Carrying  amount in  consolidated** | ** ** | ** **     | ** ** | **Fair value  measurements using** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **balance sheets**                    | ** ** | **Fair Value** | ** ** | **Level 1**                        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                                 |       |                                  |       |           |       |                               |       |   |   |   |   |
| Interest rate swap liability as of June 30, 2009     |       | $                                     | 249        |           | $          | 249                                |       | $ | — |   | $ | 249 |   | $ | — |   |
|                                                 |       |                                  |       |           |       |                               |       |   |   |   |   |
| Interest rate swap liability as of December 31, 2008 |       | $                                     | 405        |           | $          | 405                                |       | $ | — |   | $ | 405 |   | $ | — |   |

 

Wedetermined the fair value of the derivative instrument shown in the table aboveby using external broker statements which use widely accepted valuationtechniques, including discounted cash flow analysis on the expected cash flows.The analysis reflects the contractual terms of the derivatives, including theperiod to maturity, and uses observable market based inputs.

 

Tomeet the reporting requirements of FASB Staff Position No. 107-1 and APBOpinion No. 28-1, *Interim Disclosures aboutFair Value of Financial Instruments,*the Company estimates the fairvalue of financial instruments.  At June 30,2009 and December 31, 2008, there were no material differences in the bookvalues of the Company’s financial instruments and their related fair values dueto their short term nature.  Financialinstruments primarily consist of cash, accounts receivable, accounts payable,and debt instruments.

 

**9. Derivative**

 

TheCompany does not enter into derivatives or other financial instruments fortrading or speculative purposes; however, in order to manage its exposure tointerest rate risk from the Company’s existing credit facility, on January 30,2008, the Company entered into an interest rate swap (the “Swap”) with anotional amount of $20.0 million, receiving a one month LIBOR interestrate while paying a fixed rate of 2.95% over the period beginning February 8,2008 and ending November 30, 2009. The effect of the Swap is to lock theLIBOR component interest rate on $20.0 million of one month floating rateLIBOR debt at 2.95%.  As of June 30,2009 and December 31, 2008 the Swap had an estimated negative fair valueequal to $0.2 million and $0.4 million, respectively, as classified under othercurrent liabilities in the consolidated balance sheets. The estimated fairvalue of the Swap may rise and fall over the life of the Swap as marketexpectations of future floating LIBOR interest rates change in relation to thefixed rate of 2.95%. The recorded gains (losses) for the three and six monthperiods ended June 30, 2009 and 2008, that are recorded in interest expense, net in the consolidatedstatements of operations, in accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“SFAS 133”) are as follows:

 
| ** **              | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended June  30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|                    |       |                             |       |                           |       |   |   |   |   |
| Unrealized gain on Swap |       | $                                | 93         |                           | $          | 270 |   | $ | 156 |   | $ | 36 |   |
|                         |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

ThisSwap agreement contains provisions whereby if we default on our creditfacility, we may also be deemed in default of our interest rate swapobligation.  The fair value of our swapis in a liability position and totals approximately $0.2 million as of June 30,2009.  This Swap agreement shares thesame collateral as that of our credit facility and no other collateral has beenposted against this obligation.  If wewere to default on our agreement, we may be required to settle our obligationat the amount that would approximate the then fair value of the derivative.

 

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**10. Segment Information**

 

TheCompany operates in two reportable segments: financial institution services andretail inventory management services. The Company presents its segmentreporting under SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information.*Additionally, $1.5 million of the goodwill originating from the Towneacquisition has been allocated to the retail inventory management servicessegment and is therefore included in the segment’s total assets as of June 30,2008.  The $1.5 million of goodwilloriginating from the Towne acquisition was included in the goodwill impairmentrecorded as of December 31, 2008.

 

Thefollowing table summarizes the financial information concerning the Company’sreportable segments for the three and six months ended June 30, (inthousands):

 
| ** **                                             | ** ** | **Three months ended June 30, 2009** | ** ** | **Three months ended June 30, 2008**   | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **Financial  Institution  Services**      | ** ** | **Retail  Inventory  Management  Services** | ** ** | **Total** | ** ** | **Financial  Institution  Services** | ** ** | **Retail  Inventory  Management  Services** | ** ** | **Total** | ** ** |
|                                                   |       |                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                         | 14,785     |                                        | $          | 1,500 |   | $ | 16,285 |   | $ | 18,515 |   | $ | 1,974 |   | $ | 20,489 |   |
|                                                   |       |                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Gross  profit                                          |       | $                                         | 10,045     |                                        | $          | 1,303 |   | $ | 11,348 |   | $ | 13,763 |   | $ | 1,759 |   | $ | 15,522 |   |
|                                                   |       |                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Total  expenditures for additions to long-lived assets |       | $                                         | 1,416      |                                        | $          | 39 |   | $ | 1,455 |   | $ | 1,556 |   | $ | 3 |   | $ | 1,559 |   |

 
| ** **                                             | ** ** | **Six months ended June 30, 2009** | ** ** | **Six months ended June 30, 2008**     | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **Financial  Institution  Services**    | ** ** | **Retail  Inventory  Management  Services** | ** ** | **Total** | ** ** | **Financial  Institution  Services** | ** ** | **Retail  Inventory  Management  Services** | ** ** | **Total** | ** ** |
|                                                   |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                       | 31,519     |                                        | $          | 3,112 |   | $ | 34,631 |   | $ | 35,733 |   | $ | 3,951 |   | $ | 39,684 |   |
|                                                   |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Gross  profit                                          |       | $                                       | 21,150     |                                        | $          | 2,704 |   | $ | 23,854 |   | $ | 26,745 |   | $ | 3,504 |   | $ | 30,249 |   |
|                                                   |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Assets                                                 |       | $                                       | 83,377     |                                        | $          | 1,297 |   | $ | 84,674 |   | $ | 133,650 |   | $ | 3,155 |   | $ | 136,805 |   |
|                                                   |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Total  expenditures for additions to long-lived assets |       | $                                       | 2,541      |                                        | $          | 67 |   | $ | 2,608 |   | $ | 3,187 |   | $ | 25 |   | $ | 3,212 |   |
|                                                   |       |                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Goodwill                                               |       | $                                       | 24,022     |                                        | $          | 446 |   | $ | 24,468 |   | $ | 56,959 |   | $ | 2,070 |   | $ | 59,029 |   |

 

Totalgross profit by segment reconciles to operating income as follows (inthousands):

 
| ** **                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                      |       |                                 |       |                               |       |   |   |   |   |
| Gross  profit             |       | $                                    | 11,348     |                               | $          | 15,522 |   | $ | 23,854 |   | $ | 30,249 |   |
| Less:  operating expenses |       | (12,299                              | )          | (14,510                            | )          | (26,250 | ) | (29,220 | ) |
| Operating  income (loss)  |       | $                                    | (951       | )                                  | $          | 1,012 |   | $ | (2,396 | ) | $ | 1,029 |   |

 

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**11. Subsequent Events**

 

Wehave evaluated the period from June 30, 2009, the date of the financialstatements, through August 19, 2009, the date of the issuance and filingof the financial statements for subsequent events.  The following subsequent events occurredduring this period.

 

*Amendmentto Credit Agreement*

 

OnAugust 14, 2009, we executed a Fourth Amendment to Credit Agreement,Consent and Waiver.  The details of thisamendment are further explained in Note 3. Commitments and Contingencies.

 

*Executionof Merger Agreement*

 

OnAugust 16, 2009 we entered into an Agreement and Plan of Merger or MergerAgreement with Jack Henry & Associates, Inc., a Delawarecorporation or Jack Henry and Peachtree Acquisition Corporation, a Delawarecorporation and a wholly-owned subsidiary of Jack Henry.  Under the terms of the Merger Agreement, PeachtreeAcquisition Corporation will be merged with and into Goldleaf, with Goldleafcontinuing as the surviving corporation and a wholly-owned subsidiary of JackHenry.

 

Atthe effective time of the Merger, each outstanding share of our common stock,other than any shares owned by Goldleaf, Jack Henry, or Peachtree AcquisitionCorporation will be cancelled and converted into the right to receive $0.98 incash, without interest.

 

We,Jack Henry, and Peachtree Acquisition Corporation have made customaryrepresentations, warranties and covenants in the Merger Agreement.  Many of our representations and warrantiesare qualified by a materiality or material adverse effect standard.

 

OurBoard of Directors unanimously approved the Merger Agreement on August 16,2009.

 

TheMerger Agreement subjects us to a “no-shop” restriction on our ability tosolicit third party proposals, provide information and engage in discussionswith third parties. The no-shop provision is subject to a “fiduciary-out”provision that allows Goldleaf to provide information and participate indiscussions with third parties that that have delivered, or are reasonablylikely to deliver, a “superior proposal,” as defined in the Merger Agreement,if our board determines, in good faith and after consultation with advisors,that it is required to do so in order to comply with its fiduciary duties .

 

Wemay terminate the Merger Agreement under certain circumstances, including ifour board determines in good faith that we have received a superior proposal,and otherwise complies with certain terms of the Merger Agreement. Inconnection with such termination, we must pay a fee of $1.5 million to JackHenry.

 

Consummationof the Merger is not subject to a financing condition, but is subject tovarious other conditions, including approval of the Merger by our shareholdersand other customary closing conditions. The liability of Jack Henry and PeachtreeAcquisition Corporation for monetary damages under the Merger Agreement,including monetary damages resulting from Jack Henry’s refusal to consummatethe Merger when required by the Merger Agreement, is capped at $20million.  The parties expect to close theMerger late in the third quarter or early in the fourth quarter of this year.

 

Theabove summary of the Merger does not set forth all details of the Merger and issubject to, and qualified in its entirety by, the full text of the MergerAgreement attached as Exhibit 2.1 to this quarterly report, which we incorporateto this description by reference.

 

Thisdescription may be deemed to be solicitation material in respect of theproposed acquisition of the Company by Jack Henry. In connection with theproposed acquisition, we intend to file relevant materials with the SEC,including a proxy statement on Schedule 14A. SHAREHOLDERS OF GOLDLEAF ARE URGEDTO READ GOLDLEAF’S PROXY STATEMENT BECAUSE IT WILL CONTAIN IMPORTANTINFORMATION ABOUT THE PROPOSED TRANSACTION. Investors and security holders willbe able to obtain the proxy statement and other relevant documents free ofcharge at the SEC’s web site, http://www.sec.gov, and our shareholders willreceive information at an appropriate time on how to obtain transaction-relateddocuments for free from the Company. Such documents are not currentlyavailable.

 

We,our directors, and our executive officers may be deemed to be participants inthe solicitation of proxies from the holders of our common stock in respect ofthe proposed transaction. Information about our directors and executiveofficers is set forth in the proxy statement for our 2009 Annual Meeting ofShareholders, which was filed with the SEC on April 21, 2009. Investorsmay obtain additional information regarding the interest of such participantsby reading the proxy statement regarding the acquisition when it becomesavailable.

 

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*Amendmentto Employment and Change in Control Agreements*

 

Inconnection with the execution of the Merger Agreement, the Company negotiatedreductions in the amounts that could have been payable to several of our senioremployees following the consummation of the Merger, in order to directlyincrease the merger consideration payable to the shareholders of the Company.  These employees included two of our namedexecutive officers, Lynn Boggs and Dan Owens. The agreements providing for these reductions are described below.

 

OnAugust 16, 2009, we executed a Payment Waiver Agreement with Mr. Boggs.  In the Payment Waiver Agreement, Mr. Boggsagreed to waive both the right to receive $235,077 of the total change ofcontrol payments to which he could be entitled following the Merger, and theright to continuation of his stock options following the Merger.  Mr. Boggs executed the Payment WaiverAgreement in order to induce Jack Henry to directly increase the mergerconsideration payable to the shareholders of the Company by $318,875.  The provisions of the Payment WaiverAgreement will only be effective if the Merger is consummated.

 

OnAugust 16, 2009, we executed a First Amendment to our Change in ControlSeverance Pay Agreement or First Amendment with Mr. Owens.  In the First Amendment, Mr. Owens agreedto reduce the $230,000 to which he could be entitled following the Merger to$211,600.  Mr. Owens executed theFirst Amendment in order to induce Jack Henry to directly increase the mergerconsideration payable to the shareholders of the Company by $18,400.  The provisions of the First Amendment willonly be effective if the Merger is consummated.

 

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

Inthis report, all references to “we”, “us”, “our”, the “Company” and “Goldleaf”refer to Goldleaf Financial Solutions, Inc., a Tennessee corporation andits wholly owned subsidiaries.

 

**Forward-Looking Statements**

 

Thisreport contains “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. These statements relate to future economic performance, plans andobjectives of management for future operations and projections of revenues andother financial items that are based on the beliefs of our management, as wellas assumptions made by, and information currently available to, our management.The words “expect,” “estimate,” “anticipate,” “believe,” and similarexpressions are intended to identify forward-looking statements. We makeforward-looking statements in Item 2 of Part I and in Item 1A of Part IIof this report. Some of the forward-looking statements relate to our intent,belief or expectations regarding our strategies and plans for operations andgrowth. Other forward-looking statements relate to trends affecting ourfinancial condition and results of operations and our anticipated capital needsand expenditures. These statements involve risks, uncertainties andassumptions, including industry and economic conditions, competition and otherfactors discussed in this and our other filings with the SEC. Theseforward-looking statements are not guarantees of future performance and involverisks and uncertainties, and actual results may differ materially from thosethat are anticipated in the forward-looking statements. Other forward-lookingstatements relate to trends affecting our financial condition and results ofoperations and our anticipated capital needs and expenditures. See Part I,Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2008, for a description of some of the important factors thatmay affect actual outcomes.

 

Forthese forward-looking statements, we claim the protection of the safe harborfor forward-looking statements contained in the Private Securities LitigationReform Act of 1995. You should not place undue reliance on the forward-lookingstatements, which speak only as of the date of this report. All subsequentwritten and oral forward-looking statements attributable to us or any personacting on our behalf are expressly qualified in their entirety by thecautionary statements contained or referred to in this section. We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.

 

**Overview**

 

GoldleafFinancial Solutions, Inc. offers a strategic suite of integratedtechnology and payment processing solutions to financial institutions of allsizes. Goldleaf’s products and services enable financial institutions tosucceed in today’s competitive market, solidify their trusted financialrelationships, expand their presence, and improve profitability through theefficient use of technology. In addition to the suite of solutions we offer tofinancial institutions, we also offer products and services to smallbusinesses. As of June 30, 2009, we have approximately 3,500 financialinstitution relationships including 7 of the top 25 domestic banks as ranked byassets and 3 of the top 4 U.K. banks as ranked by assets.

 

Wegenerate revenue from the following three main sources:

 

·                  Financial institutionservices, which include:

 

·                  Payment solutions, and

 

·                  Lending solutions

 

·                  Retail inventory managementservices; and

 

·                  Other products and services

 

Priorto 2005, our business was primarily focused on providing lending solutions,such as accounts receivable financing solutions, and retail inventorymanagement services. Since 2005, we have made a number of strategicacquisitions and sales designed to expand our payment solutions to meet thetechnology needs of our customers and expand into all four tiers of thefinancial institutions market. We define the four tiers as:

 

·                  Tier I—financialinstitutions with assets greater than $50 billion;

 

·                  Tier II—financialinstitutions with assets between $5 billion and $50 billion;

 

·                  Tier III—financialinstitutions with assets between $1 billion and $5 billion; and

 

·                  Tier IV—Community Banksand Credit Unions—less than $1 billion in assets

 

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**Recent Developments**

 

*Executionof Merger Agreement*

 

OnAugust 16, 2009 we entered into an Agreement and Plan of Merger or MergerAgreement with Jack Henry & Associates, Inc., a Delawarecorporation or Jack Henry and Peachtree Acquisition Corporation, a Delawarecorporation and a wholly-owned subsidiary of Jack Henry.  Under the terms of the Merger Agreement, PeachtreeAcquisition Corporation will be merged with and into Goldleaf, with Goldleafcontinuing as the surviving corporation and a wholly-owned subsidiary of JackHenry. We refer to this transaction as “the Merger”.

 

Atthe effective time of the Merger, each outstanding share of our common stock,other than any shares owned by Goldleaf, Jack Henry or Peachtree AcquisitionCorporation will be cancelled and converted into the right to receive $0.98 incash, without interest.

 

We,Jack Henry, and Peachtree Acquisition Corporation have made customaryrepresentations, warranties and covenants in the Merger Agreement.  Many of our representations and warrantiesare qualified by a materiality or material adverse effect standard.

 

OurBoard of Directors unanimously approved the Merger Agreement on August 16,2009.

 

TheMerger Agreement subjects us to a “no-shop” restriction on our ability tosolicit third party proposals, provide information and engage in discussionswith third parties. The no-shop provision is subject to a “fiduciary-out”provision that allows Goldleaf to provide information and participate indiscussions with third parties that that have delivered, or are reasonablylikely to deliver, a “superior proposal,” as defined in the Merger Agreement,if our board determines, in good faith and after consultation with advisors,that it is required to do so in order to comply with its fiduciary duties .

 

Wemay terminate the Merger Agreement under certain circumstances, including ifour board determines in good faith that we have received a superior proposal,and otherwise complies with certain terms of the Merger Agreement. Inconnection with such termination, we must pay a fee of $1.5 million to JackHenry.

 

Consummationof the Merger is not subject to a financing condition, but is subject tovarious other conditions, including approval of the Merger by our shareholdersand other customary closing conditions. The liability of Jack Henry and PeachtreeAcquisition Corporation for monetary damages under the Merger Agreement,including monetary damages resulting from Jack Henry’s refusal to consummatethe Merger when required by the Merger Agreement, is capped at $20million.  The parties expect to close theMerger late in the third quarter or early in the forth quarter of this year.

 

Theabove summary of the Merger does not set forth all details of the Merger and issubject to, and qualified in its entirety by, the full text of the MergerAgreement attached as Exhibit 2.1 to this quarterly report, which weincorporate to this description by reference.

 

TheMerger Agreement has been included to provide investors and security holderswith information regarding its terms. It is not intended to provide any otherfactual information about our company. The representations, warranties andcovenants contained in the Merger Agreement were made only for purposes of thatagreement and as of specific dates, were solely for the benefit of the partiesto the Merger Agreement, and may be subject to limitations agreed upon by theparties to the agreement, including being qualified by confidential disclosuresexchanged between the parties in connection with the execution of the MergerAgreement. The representations and warranties may have been made for thepurposes of allocating contractual risk between the parties to the Merger Agreementinstead of establishing these matters as facts, and may be subject to standardsof materiality applicable to the contracting parties that differ from thoseapplicable to investors. Shareholders and potential investors are notthird-party beneficiaries under the Merger Agreement and should not rely on therepresentations, warranties and covenants nor any descriptions of therepresentations, warranties and covenants as characterizations of the actualstate of facts or condition of Goldleaf. Moreover, information concerning thesubject covenants of the representations and warranties may change after thedate of the Merger Agreement and that subsequent information may or may not befully reflected in our public disclosures.

 

*Amendmentto Credit Agreement*

 

OnAugust 14, 2009, we entered into a Fourth Amendment to Credit Agreement,Consent and Waiver.  The amendmentprovided a one-quarter waiver of our noncompliance with the debt to EBITDAratio as of June 30, 2009.  We alsoagreed that we would not borrow in excess of $40.0 million under the creditfacility until such times as we were back in compliance with the funded debt toEBITDA ratio.  Furthermore, beginning September 1,2009, the pricing of the credit facility will change so that the Company willbegin paying a rate of 4.75% per annum over LIBOR for LIBOR loans and lettersof credit, a rate of 3.75% per annum over the bank’s Base Rate for Base Rate loansinstead of rates based on a sliding scale. In addition, the lending group will now charge a 0.75% commitment fee onthe unused portion of our credit facility of $45.0 million.  These changes will remain in effect until weare back in compliance with the debt to EBITDA ratio.  Bank of America, as agent under the creditfacility, also charged a 25 basis point fee for the amendment.

 

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*Cost-CuttingInitiatives*

 

Duringthe three months ended June 30, 2009, management evaluated expenses andfurther analyzed cost reductions in an effort to respond to declining revenuesand gross profit in the past two quarters as a result of the global economicdownturn.  Management focused on costreductions in various categories and found reductions mainly in salaries and fringebenefits, third party contractor costs, and various infrastructureexpenses.  Management expects theirefforts to reduce operating expense by approximately $3.9 million over the nexttwelve months of operations.

 

**Descriptionof Revenues and Expenses**

 

Wegenerate revenue from the following three main sources:

 

·                  Financial institutionservices, which include:

 

·                  Payment solutions, and

 

·                  Lending solutions

 

·                  Retail inventory managementservices; and

 

·                  Other products and services

 

***Financial Institution Services:***

 

***Payment Solutions:***

 

We offer a variety of payment technology solutions to financialinstitutions and processors which help in the acquisition, automation, andprocessing of payments and deposits. Our solutions provide benefits in thetransition of a deposit into an electronic payment and the electronic processingof payments. These payment solutions consist primarily of software and serviceswhich are delivered on either an in-house or a hosted basis. Revenue isgenerated from the deployment and use of these various products through licensefees, implementation services, software maintenance fees, hosting fees, and pertransaction fees.

 

***Deposit Automation and Remote Deposit***

 

We provide payment solutions which automate the deposit process atfinancial institution branches, cash vaults, and ATMs. Our solutionsconvert customer paper deposits to electronic deposits at these locations,which reduce costs through truncation and automation improving quality andcustomer service. We provide these solutions primarily on an in-house basiswith the technology being deployed throughout the financial institution at anypoint of check presentment using a license, implementation services, andsoftware maintenance revenue model.

 

We offer remote deposit solutions that enable a financial institution’scustomers to make a check deposit from their own offices by converting thecheck payment directly into an electronic deposit. Benefits accrue to thebusiness in convenience, reduced costs, cash position, and improved treasuryoperations. Additionally, benefits accrue to the financial institution inenhanced revenue, increased deposits, increased customer satisfaction, andreduced costs. A number of remote deposit solutions, including check andremittance, are sold either in-house or on a hosted basis in order to serve thedifferent needs of various sized financial institutions. These financialinstitutions in turn deploy and sell these solutions to their businesscustomers generating additional revenue for Goldleaf via additional licensesand transaction fees.

 

***ACH Origination and Processing***

 

We offer a comprehensive system for the acquisition and processing ofAutomated Clearing House (“ACH”) transactions. Our ACH solutions providefinancial institutions the ability to offer business customers a web-basedbrandable tool for the acquisition of ACH transactions. Transactions can bemanually created, imported from source data contained at the business, orcaptured from original documents, such as converted checks. We further providefinancial institutions with the processing capacity to manage all facets ofincoming and outgoing ACH files and of ACH processing, including risk tracking,fee calculations, rule compliance, and daily operations. While oursolutions to acquire and process transactions can be used independently, manyfinancial institutions use the two solutions together. Our ACH solutions servethe needs of various sized financial institutions and can be deployed 

 

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using either a hosted or in-house model. Our ACH contracts aretypically five year contracts. We generate revenue from our ACH solution soldto banks via licenses, monthly per transaction fees, monthly hosting fees andmaintenance fees.

 

***Item and Image Processing***

 

Increased technological development, regulatory changes, and changingbanking practices have created a demand for faster, more efficient electronichandling of bank documents, including checks. The need to reduce labor,research time, and the cost of postage has increased the demand for checkimaging solutions. Check imaging involves creating digital images of paperchecks. Images of insufficient checks, stop payments, and large dollar checksare presented online to bank operations staff for review. Financialinstitutions employ check imaging as part of their efforts to reduce operatingcosts and provide enhanced banking services to their customers. We generaterevenue from license fees, implementation services, maintenance fees, andtraining.

 

Additionally, we provide a turnkey solution for check imagingactivities that provides our customers the ability to offer check imagingeither on an in-house basis through the purchase of our proprietary softwaresolution or on an outsourced basis through our data center without a largecapital expenditure. Our systems deliver a suite of check imaging products,including front and back imaging on customer statements, clearing andsettlement, reconciliation, and automated exception processing. This systemallows bank employees and bank customers to retrieve imaged checks on personalcomputers to facilitate signature verification and improve research. We providethese services through our service bureau operations using third party softwaresystems. We also have the capability to provide these services through servicebureau operations. Item and image processing provided through a service bureaugenerates revenue through an initial fee and ongoing monthly per item fees.

 

***Data Conversion Services***

 

We provide digital to digital conversion and migration services fordocument images, check images, data and computer reports which we output tolaser disk. We generate revenue by charging a fee per volume count of data tobe converted.

 

***Website Design and Hosting***

 

Almost all financial institutions seek to have a sophisticated anddynamic website. Our website design and hosting services for financialinstitutions provides everything a financial institution typically desires. Wedo not host any confidential bank data on our servers. We generate revenue fromprofessional fees associated with the design and implementation of eachwebsite, monthly hosting fees for sites we host in our data center, and formaintenance performed on those websites.

 

***Lending Solutions:***

 

***Accounts Receivable Financing***

 

We offer financing programs to financial institutions to developlasting, positive, and profitable relationships with small to medium sizedbusiness customers through the financing of accounts receivable. The programoffers insight into the small or medium sized business’s operation and creditcontrols, while providing a favorable return to the financial institution. Wehave no credit risk exposure under this program. For those borrowers that donot meet the regulatory or credit criteria of the lender, we offer alternativesources of financing through the LendingNetworkTM, a network of specialtylenders. We generate revenue from license fees. Additionally we generaterevenue mainly from two types of participation fees. We charge a percentage ofthe accounts receivables financed upon initial financing of the financialinstitutions customer’s accounts receivable. We also receive a participationfee of any ongoing financing of the accounts receivables.

 

***Leasing***

 

We offer a turnkey equipment leasing program to our financialinstitutions clients and their small business customers. We have no credit riskexposure for these leases. Our leases fall into two categories: directfinancing leases and operating leases. For those opportunities that may not fita particular financial institution’s criteria, we offer a funding alternativethrough a third-party broker relationship. We have no credit risk for theseleases. For direct financing leases, the investment in direct financing leasesconsists of the sum of the minimum lease payments due during the remaining termof the lease and unguaranteed residual value of the leased asset. We record the

 

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difference between the sum and the cost of the leased assets asunearned revenue which is recognized as revenue over the lease term. Operatingleases are recognized as revenue at the time of invoicing.

 

***Retail Inventory Management Services***

 

We offer retail management solutions such as inventory merchandisingand forecasting to specialty retail stores. For many small retailers, theirmost critical success factor is inventory management.

 

We generate revenue from fees we charge primarily for providinginventory merchandising and forecasting information to retail stores andancillary services related to these products.

 

***Other Products and Services***

 

We generate revenues from hardware sales of scanner equipment andprinters used with our financial institution services software. We also sellstandard business forms used in our BusinessManager® program for our lending solutions along withgenerating revenue from statement rendering and mailing.

 

***Expenses***

 

Our expenses consist of cost of revenues, generaland administrative, selling and marketing, research and development,amortization, other operating expenses, interest, and taxes.  Our cost of revenues mainlyincludes salaries, software development amortization, hosting fees, third partyroyalty fees, and the cost of hardware. General and administrative expenses include corporate charges forexecutives, internal systems, human resources, finance, and legal.  Selling and marketing expenses include salariesand commissions paid to our sales force, travel costs of the sales force,recruiting for new sales and marketing personnel, marketing fees associatedwith direct and telemarketing programs, and tradeshows.  We continue to incur expenses related to researchand development as needed to meet our financial institution customer’s needsand expectations in the market.  Researchand development expenses include the non-capitalizable direct costs associatedwith developing new versions of our software, as well as other softwaredevelopment projects that, in accordance with GAAP, we do not capitalize.  Amortization mainly consists of acquiredintangibles.

 

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**Resultsof Operations**

 

Thefollowing table sets forth, for the periods indicated, the dollar andpercentage relationship of the identified consolidated statement of operationsitems to total revenues.

 
| ** **                            | ** ** | **For the three months ended June 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| Revenues:                             |       |                                         |       |   |   |   |   |   |   |
| Financial  institution services       |       | $                                            | 13,776     |   | 84.6 | % | $ | 17,510 |   | 85.5 | % |
| Retail  inventory management services |       | 1,500                                        |       | 9.2 |   | 1,974 |   | 9.6 |   |
| Other  products and services          |       | 1,009                                        |       | 6.2 |   | 1,005 |   | 4.9 |   |
| Total  revenues                       |       | 16,285                                       |       | 100.0 |   | 20,489 |   | 100.0 |   |
|                                  |       |                                         |       |   |   |   |   |   |   |
| Cost  of Revenues:                    |       |                                         |       |   |   |   |   |   |   |
| Financial  institution services       |       | 4,042                                        |       | 24.8 |   | 4,151 |   | 20.3 |   |
| Retail  inventory management services |       | 197                                          |       | 1.2 |   | 215 |   | 1.0 |   |
| Other  products and services          |       | 698                                          |       | 4.3 |   | 601 |   | 2.9 |   |
| Gross  profit                         |       | 11,348                                       |       | 69.7 |   | 15,522 |   | 75.8 |   |
|                                  |       |                                         |       |   |   |   |   |   |   |
| Operating  Expenses:                  |       |                                         |       |   |   |   |   |   |   |
| General  and administrative           |       | 5,184                                        |       | 31.8 |   | 6,404 |   | 31.3 |   |
| Selling  and marketing                |       | 4,221                                        |       | 25.9 |   | 5,027 |   | 24.5 |   |
| Research  and development             |       | 2,028                                        |       | 12.5 |   | 1,646 |   | 8.0 |   |
| Amortization                          |       | 929                                          |       | 5.7 |   | 1,409 |   | 6.9 |   |
| Other  operating expenses             |       | (63                                          | )          | (0.4 | ) | 24 |   | 0.1 |   |
| Total  operating expenses             |       | 12,299                                       |       | 75.5 |   | 14,510 |   | 70.8 |   |
| Operating  (loss) income              |       | (951                                         | )          | (5.8 | ) | 1,012 |   | 5.0 |   |
|                                  |       |                                         |       |   |   |   |   |   |   |
| Interest  expense, net                |       | 485                                          |       | 3.0 |   | 461 |   | 2.2 |   |
|                                  |       |                                         |       |   |   |   |   |   |   |
| (Loss)  income before income taxes    |       | (1,436                                       | )          | (8.8 | ) | 551 |   | 2.8 |   |
|                                  |       |                                         |       |   |   |   |   |   |   |
| Income  tax provision                 |       | 65                                           |       | 0.4 |   | 229 |   | 1.1 |   |
|                                  |       |                                         |       |   |   |   |   |   |   |
| Net  (loss) income                    |       | $                                            | (1,501     | ) | (9.2 | )% | $ | 322 |   | 1.7 | % |

 

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| ** **                            | ** ** | **For the six months ended June 30,** | ** **   |
|---------------------------------------|------------|--------------------------------------------|--------------|
| ** **                            | ** ** | **2009**                                   | ** **   | **2008** | ** ** |
| Revenues:                             |       |                                       |         |   |   |   |   |   |   |
| Financial  institution services       |       | $                                          |  28,813 |   | 83.2 | % | $ |  33,879 |   | 85.4 | % |
| Retail  inventory management services |       | 3,112                                      |         | 9.0 |   | 3,951 |   | 9.9 |   |
| Other  products and services          |       | 2,706                                      |         | 7.8 |   | 1,854 |   | 4.7 |   |
| Total  revenues                       |       | 34,631                                     |         | 100.0 |   | 39,684 |   | 100.0 |   |
|                                  |       |                                       |         |   |   |   |   |   |   |
| Cost  of Revenues:                    |       |                                       |         |   |   |   |   |   |   |
| Financial  institution services       |       | 8,427                                      |         | 24.3 |   | 7,891 |   | 19.9 |   |
| Retail  inventory management services |       | 408                                        |         | 1.2 |   | 447 |   | 1.1 |   |
| Other  products and services          |       | 1,942                                      |         | 5.6 |   | 1,097 |   | 2.8 |   |
| Gross  profit                         |       | 23,854                                     |         | 68.9 |   | 30,249 |   | 76.2 |   |
|                                  |       |                                       |         |   |   |   |   |   |   |
| Operating  Expenses:                  |       |                                       |         |   |   |   |   |   |   |
| General  and administrative           |       | 10,864                                     |         | 31.4 |   | 12,673 |   | 31.9 |   |
| Selling  and marketing                |       | 9,044                                      |         | 26.1 |   | 10,410 |   | 26.2 |   |
| Research  and development             |       | 4,178                                      |         | 12.1 |   | 3,502 |   | 8.8 |   |
| Amortization                          |       | 1,894                                      |         | 5.5 |   | 2,595 |   | 6.5 |   |
| Other  operating expenses             |       | 270                                        |         | 0.8 |   | 40 |   | 0.1 |   |
| Total  operating expenses             |       | 26,250                                     |         | 75.9 |   | 29,220 |   | 73.5 |   |
| Operating  (loss) income              |       | (2,396                                     | )            | (7.0 | ) | 1,029 |   | 2.7 |   |
|                                  |       |                                       |         |   |   |   |   |   |   |
| Interest  expense, net                |       | 1,025                                      |         | 3.0 |   | 1,380 |   | 3.5 |   |
|                                  |       |                                       |         |   |   |   |   |   |   |
| Loss  before income taxes             |       | (3,421                                     | )            | (10.0 | ) | (351 | ) | (0.8 | ) |
|                                  |       |                                       |         |   |   |   |   |   |   |
| Income  tax provision (benefit)       |       | 94                                         |         | 0.3 |   | (160 | ) | (0.4 | ) |
|                                  |       |                                       |         |   |   |   |   |   |   |
| Net  loss                             |       | $                                          |  (3,515 | ) | (10.3) % |   | $ |  (191 | ) | (0.4) % |   |

 

Inthe second quarter of operations for 2009, we decided that we would no longerprovide our Originator Direct service, our solution that directly processed andcleared ACH transactions for merchants. This product offering resulted in restricted cash balances and customerdeposits reflected on our balance sheet.  As of June 30, 2009, our restricted cash balance was reduced to$39,000, a reduction of approximately $1.3 million since December 31,2008.  Our customer deposits have alsodecreased $1.3 million in direct relation to restricted cash and the ceasing ofthis solution.  The revenue and cost ofrevenues related to this solution were insignificant to our consolidatedstatements of operations for the three and six months ended June 30, 2009and 2008.

 

*Total Revenues -*Total revenues decreased 20.5% to$16.3 million for the three months ended June 30, 2009, compared to$20.5 million for the three months ended June 30, 2008.  Total revenues decreased 12.7% to$34.6 million for the six months ended June 30, 2009, compared to$39.7 million for the six months ended June 30, 2008.

 

*Financial Institution Services Revenues -* Financialinstitution service revenues decreased 21.3% and 15.0% to $13.8 million and$28.8 million for the three and six months ended June 30, 2009 as comparedto $17.5 million and $33.9 million for the comparable periods ended June 30,2008.  The decrease of $3.7 million and$5.1 million for the three and six months ended June 30, 2009 is primarilyattributable to a decrease in our lending solutions of $1.9 million and $4.0million for the three and six months ended June 30, 2009 and a decrease inour payments solutions of $1.8 million and $1.1 million for the three and sixmonths ended June 30, 2009.

 

Thedecrease of $1.9 million and $4.0 million for the three and six months ended June 30,2009 related to our lending solutions is primarily attributable to a decreasein per transaction fees and active merchants. Our lending solutions business generates revenue from per transactionfees when our financial institution clients finance their customer’s, alsoknown as merchants, receivables.  We havenot experienced a decline in our merchants, yet we have experienced a declinein our active merchants.  Due to thecurrent recession, active merchants are generating smaller accounts receivablebalances, therefore, we are experiencing a decrease in per transaction fees.

 

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Thedecrease of $1.8 million and $1.1 million for the three and six months ended June 30,2009 related to our payment solutions is a result of decreases due toeliminated product lines, our enterprise payment solutions, and our dataconversion solutions which are offset by increases in various other paymentproduct offerings.   Our eliminatedproduct offerings resulted in decreases of $0.3 million and $0.6 million forthe three and six months ended June 30, 2009.  The eliminated products include our coreprocessing and item processing solutions that we sold in December 2008.    Our enterprise payment solutions resultedin decreases of $1.8 million and $0.6 million for the three and six monthsended June 30, 2009, which is primarily a result of decreased license revenuepartially offset by increases in maintenance and professional revenues.  Enterprise payment solutions license feesdecreased $2.1 million and $2.4 million for the three and six months ended June 30,2009 as a result of lower demand and the timing of revenue recognition onproject implementation.  Enterprisemaintenance and professional revenues increased $0.3 million and $1.8 millionfor the three and six months ended June 30, 2009 as a result of completedprojects where customers are beginning support periods and one largeprofessional service project that was completed in early 2009.  Our data conversion solution decreased $0.2million and $0.6 million for the three and six months ended June 30, 2009and is attributable to a decrease in the number of conversions completed thisyear compared to last year.  The increaseof $0.5 million and $0.7 million in our other payment product offerings is aresult of additional customers purchasing our web design and hosting solutionalong with additional customers licensing our imaging solution.

 

Asa percentage of total revenues, financial institution service fees decreased to84.6% and 83.2% for the three and six months ended June 30, 2009 comparedto 85.5% and 85.4% for the three and six months ended June 30, 2008.

 

*Retail Inventory Management Services Revenues —* Retailinventory management services revenues decreased 24.0% and 21.2% to $1.5million and $3.1 million for the three and six months ended June 30, 2009as compared to $2.0 million and $4.0 million for the comparable periods ended June 30,2008.  The decrease is a result of fewercustomers using our retail inventory management services due to the economicdecline in the retail market.  As apercentage of total revenues, retail inventory management services decreased to9.2% and 9.0% for the three and six months ended June 30, 2009 compared to9.6% and 9.9% for the three and six months ended June 30, 2008.

 

*Other Products and Services Revenues -* Revenues fromother products and services remained consistent for the three months ended June 30,2008 and 2009 at $1.0 million and reflected an increase of 45.9% to $2.7million for the six months ended June 30, 2009 as compared to $1.9 millionfor the comparable period ended June 30, 2008.  The increase is mainly a result of scannersales related to our enterprise payment solutions. As a percentage of totalrevenues, other products and services increased to 6.2% and 7.8% for the threeand six months ended June 30, 2009 compared to 4.9% and 4.7% for the threeand six months ended June 30, 2008.

 

*Cost of Revenues- financial institution services —*Cost of revenues for financial institutionservices decreased 2.6% and increased 6.8% to $4.0 million and $8.4 million forthe three and six months ended June 30, 2009 as compared to $4.2 millionand $7.9 million for the comparable periods ended June 30, 2008.  The decrease of $0.2 million and increase of$0.5 million for the three and six months ended June 30, 2009 is primarilyattributable to our eliminated product lines, our enterprise payment solutionsand our other various payment solutions.

 

Oureliminated product lines, the core and item processing sold in December 2008,decreased $0.1 million and $0.3 million for the three and six months ended June 30,2009.  Our Enterprise payment solutionsdecreased $0.3 million for the three months ended June 30, 2009 due todecreasing royalty fees owed to third party vendors as a direct result oflicensing revenue decreasing.  OurEnterprise payment solutions increased $0.4 million for the six months ended June 30,2009 mainly due to additional salaries needed as additional hours were neededfor projects.  Our other paymentsolutions costs increased $0.2 million and $0.4 million for the three and sixmonths ended June 30, 2009 and were mainly attributable to additionalamortization on our web hosting solution for newly released software along withincreased compensation and other costs needed for increased sales.

 

Asa percentage of total revenues, cost of revenues financial institution servicefees increased to 24.8% and 24.3% for the three and six months ended June 30,2009 compared to 20.3% and 19.9% for the three and six months ended June 30,2008.

 

*Cost of Revenues-retail inventory management services —* Cost of revenues related to retail inventory managementservices decreased 8.8% and 8.7% to $197,000 and $408,000 for the three and sixmonths ended June 30, 2009 as compared to $215,000 million and $447,000for the comparable periods ended June 30, 2008.  The decrease is a direct result of ourdecline in revenues as fewer customers are using our retail inventorymanagement services due to the economic decline in the retail market.  As a percentage of total revenues, cost ofsales retail inventory management services increased to 1.2% for both the threeand six months ended June 30, 2009 compared to 1.0% and 1.1% for the threeand six months ended June 30, 2008.

 

*Cost of Revenues-other products and services -*Cost of revenues related to other products and services increased 16.1% and77.0% to $0.7 million and $1.9 million for the three and six months ended June 30,2009 as compared to $0.6 million and $1.1 million for the comparable periodsended June 30, 2008.  The increaseis related to the hardware costs associated with increased scanner sales thatwe experienced in our enterprise payment solution.  As a percentage of total revenues, cost ofsales other products and services increased to 4.3% and 5.6% for both the threeand six months ended June 30, 2009 compared to 2.9% and 2.8% for the threeand six months ended June 30, 2008.

 

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*General and Administrative* - General andadministrative expenses decreased 19.1% and 14.3% to $5.2 million and$10.9 million for the three and six months ended June 30, 2009, comparedto $6.4 million and $12.7 million for the three and six months ended June 30,2008. The decrease is mainly a result of decreased compensation costs, internalsystems costs, and facility costs as management focused on cost reductions as aresult of gross profit decline.  As apercentage of total revenues, general and administrative expenses increased to31.8% and decreased to 31.4% for the three and six months ended June 30,2009 compared to 31.3% and 31.9% for the three and six months ended June 30,2008.

 

*Selling and Marketing -* Selling and marketingexpenses decreased 16.0% and 13.0% to $4.2 million and $9.0 million forthe three and six months ended June 30, 2009, compared to$5.0 million and $10.4 million for the three and six months ended June 30,2008.  The reduction is mainlyattributable to a reduction in commissions for revenue declines in our varioussolutions.  As a percentage of totalrevenues, selling and marketing expenses increased to 25.9% for the threemonths ended June 30, 2009, compared to 24.5% for the three months ended June 30,2008.  As a percentage of total revenues,selling and marketing expenses decreased to 26.1% for the three months ended June 30,2009, compared to 26.2% for the six months ended June 30, 2008.

 

*Research and Development -* Research and developmentexpenses increased 23.2% and 19.3% to $2.0 million and $4.2 million forthe three and six months ended June 30, 2009, compared to$1.6 million and $3.5 million for the three and six months ended June 30,2008.  The increase is primarily due toincreased internal systems costs on the development of our software solutionsthat we cannot capitalize.  As apercentage of total revenues, research and development expenses increased to12.5% and 12.1% for the three and six months ended June 30, 2009, comparedto 8.0% and 8.8% for the three and six months ended June 30, 2008.

 

*Amortization* - Amortization expensesdecreased 34.1% and 27.0% to approximately $1.0 million and $1.9 millionfor the three and six months ended June 30, 2009, compared to$1.4 million and $2.6 million for the three and six months ended June 30,2008.  The decrease is primarily due tothe reduction in acquired intangibles related to the sale of our coreprocessing and teller software business in December 2008.  As a percentage of total revenues,amortization expense decreased to 5.7% and 5.5% for the three and six monthsended June 30, 2009, compared to 6.9% and 6.5% for the three and sixmonths ended June 30, 2008.

 

*Other Operating Income (Expenses) –* For the threemonths ended June 30, 2009, other operating income totaled $63,000compared to $24,000 of other operating expense for the comparable period in theprior year.  The income for the threemonths ended June 30, 2009 is attributable to receiving funds for apreviously written off receivable. Other operating expenses increased to$270,000 for the six months ended June 30, 2009 as compared to $40,000 forthe six months ended June 30, 2008. Other operating expenses, for the six months ended June 30, 2009,includes severance and facility restructuring charges related to the core andteller systems business, which was sold in December 2008, of approximately$312,000.

 

*Operating Income (Loss) -* As a result of the abovefactors, our operating loss totaled $1.0 million for the three months ended June 30,2009, compared to operating income of $1.0 million for the three months ended June 30,2008.  For the six months ended June 30,2009 our operating loss totaled $2.4 million compared to operating income of$1.0 million for the six months ended June 30, 2008.

 

*Interest Expense, Net -* Interest expense, netincreased 5.2% and decreased 25.6% to $0.5 million and $1.0 million forthe three and six months ended June 30, 2009, compared to$0.4 million and $1.4 million for the three and six months ended June 30,2008. The increase in the three months ended June 30, 2009 is a result ofincreased debt issuance costs being expensed, related to the maturity dateextension on the revolver in December 2008 and the amended definition ofEBITDA in February 2009.  Thedecrease of $0.4 million for the six months ended June 30, 2009 is relatedto the decrease in the weighted average interest rate of approximately 3% alongwith a reduction in the outstanding debt under our credit facility.  As of June 30, 2008, the balance of ourrevolving line of credit totaled $41.0 million as we used $33.0 million toacquire our enterprise payment solutions.  As of June 30, 2009 our revolving line of credit totaled $35.5million, which is a period-over-period reduction of $5.5 million.

 

*Income Tax Provision (Benefit) –* The effectivetax rates for the three and six months ended June 30, 2009 were (4.5%) and(2.7%) compared to 41.6% and 45.6% for the three and six months ended June 30,2008.   For the three months ended June 30,2009, tax expense totaled $65,000 and consisted of federal and state income taxbenefit of approximately $0.5 million offset by foreign income tax expense ofapproximately $65,000, and a valuation allowance of $0.5 million. For the sixmonths ended June 30, 2009, tax expense totaled $94,000 and consisted offederal and state income tax benefit of approximately $1.2 million offset byforeign income tax expense of approximately $94,000, and a valuation allowanceof $1.2 million.  For the three and sixmonths ended June 30, 2008, tax expense (benefit) totaled $0.2 million and($0.2) million, respectively.  Theprimary reason for the difference between the effective tax ratesperiod-over-period is due to the Company’s valuation allowance that wasrecorded against deferred tax assets for the three and six months ended June 30,2009.

 

Asof June 30, 2009 and December 31, 2008, the Company believed that itis more likely than not that the Company will not be able to generatesufficient taxable income in future years in order to realize the deferred taxassets that are recorded, with certain exceptions. As such a valuationallowance of $5.9 million and $4.7 million has been provided againstthe Company’s federal and state deferred tax assets as of June 30, 2009and December 31, 2008, respectively.

 

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**Liquidityand Capital Resources**

 

Thefollowing table sets forth the elements of our cash flow statement for the sixmonths ended June 30, (in thousands):

 
| ** **                                           | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Net  cash provided by operating activities           |       | $                                     | 812        |   | $ | 6,367 |   |
| Net  cash used in investing activities               |       | (2,008                                | )          | (35,547 | ) |
| Net  cash (used in) provided by financing activities |       | (2,613                                | )          | 32,035 |   |
| Net  change in cash and cash equivalents             |       | $                                     | (3,809     | ) | $ | 2,855 |   |

 

***Cash from Operating Activities***

 

Wegenerated $1.6 million in operating cash for the three months ended June 30,2009, as compared to using $0.8 million in the three months ended March 31,2009, resulting in total cash provided by operating activities of $0.8 millionfor the six months ended June 30, 2009.

 

Cashprovided by operations for the six months ended June 30, 2009 wasattributable to a net loss of $3.5 million increased due to the noncashimpact of depreciation and amortization expense of $3.7 million,amortization of debt issuance costs $0.1 million, stock compensation expense of$0.6 million, $4.0 million for the reduction in trade accountsreceivable, $0.5 million for the reduction in inventory, and $0.2 millionfor other non-current assets and liabilities changes.  These amounts are partially offset by $0.2million of amortization of lease income and initial direct costs, $0.2 millionof unrealized gain on interest rate swap, $1.4 million for the decrease inaccrued liabilities, and $3.0 million for the decrease in deferred revenue.

 

Cashprovided by operations for the six months ended June 30, 2008 wasattributable to a net loss of $0.2 million increased due to the noncashimpact of depreciation and amortization expense of $4.3 million,amortization of debt issuance costs of $0.1 million, stock compensation expenseof $0.4 million, $2.2 million of restricted cash and customer deposits,and $1.1 million for the increase in accrued liabilities. These amounts arepartially offset by deferred income taxes of $0.2 million, amortization oflease income and initial direct costs of $0.3 million, $0.1 for anincrease in trade accounts receivable, $0.3 million of an increase ininventory, $0.2 million for a decrease in accounts payable, and $0.4 millionfor an decrease in deferred revenue.

 

***Cash from Investing Activities***

 

Cashused in investing activities totaled $2.0 million for the six months endedJune 30, 2009 and consisted primarily of additions to property andequipment of $0.6 million, software development costs of $1.8 million andadditions to intangibles and other assets of $0.2 million. These cash uses wereoffset by $0.6 million in net proceeds from our direct finance leasesactivities.

 

Cashused in investing activities totaled $35.5 million for the six monthsended June 30, 2008 and consisted primarily of business acquisitions, purchasesof property and equipment, and capitalization of software development costs. Weused $33.0 million to purchase the assets of Alogent in January 2008to acquire our enterprise payment solutions. Additions to property andequipment totaled $1.4 million, software development costs were $1.5 million,and additions to intangibles and other assets were $0.3 million.  These cash uses were offset by$0.7 million in net proceeds from our direct finance leases activities.

 

***Cash from Financing Activities***

 

Duringthe six months ended June 30, 2009, net cash used in financing activitieswas $2.6 million and was attributable primarily to the repayment on ourrevolving line of credit of $3.0 million of which we received proceeds of $1.0million. We received proceeds from non-recourse lease notes payables of$0.6 million offset by payment on non-recourse lease notes payables of$0.9 million.  We paid $0.2 millionon our capital lease obligations along with $0.1 million on long-term debt.

 

Duringthe six months ended June 30, 2008, net cash provided by financingactivities was $32.0 million and was attributable primarily to borrowingof $33.5 million from our revolving line of credit of which we repaid $1.0million. We received proceeds from non-recourse lease notes payables of$0.6 million offset by payment on non-recourse lease notes payables of$0.9 million.  We paid $0.2 millionon our capital lease obligations.

 

***Analysis of Changes in WorkingCapital Deficit***

 

Asof June 30, 2009, we had a working capital deficit of approximately$50.9 million compared to a working capital deficit of $4.6 million as of June 30,2008. The decrease in working capital is primarily related to the maturity dateof our revolving line of credit on January 15, 2010 totaling $35.5 millionand the maturity date of the convertible notes on January 17, 2010totaling $7.0 million.  Other decreasesare $3.8 million in cash, $4.0 million of trade accounts receivables, and $0.5million of inventory.  These decreases 

 

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wereoffset by reductions of accrued liabilities of $1.4 million, deferred revenueof $2.9 million and non-recourse lease notes payables of $0.3 million.

 

Webelieve that the existing cash available, future operating cash flows and ourrevolving line of credit will be sufficient to meet our working capital, debtservice, and capital expenditure requirements until the end of the fiscal year.We were in compliance with all restrictive non-financial covenants as of June 30,2009.  We are not in compliance with allof our financial covenants as of June 30, 2009 and received a waiver fromour lender group.  The covenant that weare not in compliance with is the funded debt to EBITDA.  There can be no assurance that we will havesufficient cash flows to meet our obligations or that we will remain incompliance with the covenants. Non-compliance with these covenants could have amaterial adverse effect on our operating and financial results. If we areunable to complete the proposed merger with Jack Henry & Associates, Inc.,we would need to refinance our debt. Our ability to continue as a going concernwould be contingent upon our ability to secure financing. There can be noassurances that refinancing would be available to us at all or on favorableterms.

 

***Revolving Line of Credit***

 

OnAugust 14, 2009, we executed a Fourth Amendment and Waiver (the “FourthAmendment”)  to our Second Amended andRestated Credit Agreement with Bank of America, N.A., Wachovia Bank, N.A., andThe People’s Bank of Winder, dated November 30, 2006, as amended on January 17,2008, December 24, 2008, and February 18, 2009.

 

Pursuantto the Fourth Amendment, Bank of America, N.A., as Agent, waived the Company’snon-compliance with the debt to EBITDA ratio as of June 30, 2009.  We also agreed that we would not borrow inexcess of $40.0 million under the credit facility until such time as we wereback in compliance with the funded debt to EBITDA ratio.  Furthermore, beginning September 1,2009, the pricing of the credit facility will change so that the Company willbegin paying a rate of 4.75% per annum over LIBOR for LIBOR loans and lettersof credit, a rate of 3.75% per annum over the bank’s Base Rate for Base Rate loansinstead of rates based on a sliding scale. In addition, the lending group will now charge a 0.75% commitment fee onthe unused portion of our credit facility of $45.0 million.  These changes will remain in effect until weare back in compliance with the debt to EBITDA ratio.  Bank of America, as agent under the creditfacility charged a 25 basis point fee for the amendment.

 

Therevolving line of credit is classified as a current liability as of June 30,2009, compared to a long term liability as of December 31, 2008, as thematurity date of the credit agreement, which is January 15, 2010, causesthis liability to be due in less than one year from the balance sheetdate.  As of June 30, 2009 and December 31,2008 we owed $35.5 million and $37.5 million, respectively, on therevolving line of credit.   We were incompliance with all restrictive non-financial covenants and all but onefinancial covenant (funded debt to EBITDA) as of June 30, 2009.

 

Thematerial terms of the syndicated credit facility are as follows:

 

·                  the revolving loancommitment is $45.0 million, yet we have agreed to only borrow $40.0million until such time as we are back in compliance with the funded debt to EBITDAratio;

 

·                  the limit on annual capitalexpenditures is $7.0 million;

 

·                  4.75% per annum for LIBORfor LIBOR loans and letters of credit, 3.75% per annum over the banks’ BaseRate for Base Rate loans, along with a 0.75% commitment fee for the unusedportion of the credit facility up to $40.0 million;

 

·                  the funded debt to EBITDAratio (as defined) is 3.0;

 

·                  the senior funded debt toEBITDA ratio (as defined) is 3.0; and

 

·                  the Company is to maintain afixed charge coverage ratio (as defined) of not less than 2:1.

 

***Convertible Notes Payable***

 

TheCompany executed convertible notes of $7.0 million delivered to theAlogent shareholders on January 17, 2008, having a 24 month term anda 7.0% annual interest rate payable quarterly in arrears. The principal underthe notes is convertible, at the option of the holder, into shares of ourcommon stock at a conversion price of $4.50 per share.   These notes have a maturity date of January 17,2010 and are classified as a current liability as of June 30, 2009compared to a long-term liability as of December 31, 2008.

 

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**CriticalAccounting Policies**

 

We have based ourdiscussion and analysis of financial condition, results of operations, andliquidity and capital resources on our consolidated financial statements. Thepreparation of these consolidated financial statements in accordance with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the dates of the financial statements, and the reported amountsof revenues and expenses during the reporting periods. Management evaluates itscritical accounting policies and estimates on a periodic basis.

 

A “critical accountingpolicy” is one that is both important to the understanding of our financialcondition and results of operations and requires management’s most difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain.

 

Please refer to ourAnnual Report on Form 10-K for the year ended December 31, 2008for a complete discussion of our critical accounting policies.

 

*Intangibles and Other Assets andGoodwill*

 

Goodwillconsists of the excess of purchase price over the fair value of theidentifiable assets and liabilities acquired. Intangible and other assetsinclude identified intangibles, such as non-compete agreements, customer lists,trade names and trademarks, and technology acquired in acquisitions. Alsoincluded in intangible and other assets are debt issuance costs that areamortized using the effective interest method over the respective terms of thefinancial institution loans. As of June 30, 2009 and 2008, the Companybelieves no impairment to the identifiable intangibles and other assetsexisted.

 

Onan annual basis, our goodwill is tested for impairment or when events andcircumstances indicate impairment may exist. In accordance with SFAS 142, *Goodwill and Other Intangible Assets*, wehave determined that our reporting units are the reportable segments based onour organizational structure and the financial information that is provided toand reviewed by management. Our segments defined as reporting units includefinancial institution services and retail inventory management services.

 

Impairmenttesting of goodwill is performed in two steps. First, the carrying value of thereporting unit is compared to the fair value of the reporting unit.  To determine fair value in step one; weutilize approaches which focus on our ability to produce income and theestimated consideration which we would receive if there were to be a sale ofthe reporting units. Consideration is given to our discounted projected futurecash flows, our market capitalization, and market multiples of comparablecompanies within the industry. If the carrying value is less than the fairvalue, no goodwill impairment is recorded. However, should the carrying amountfor the reporting unit exceed its fair value, then we proceed to the secondstep of the goodwill impairment testing.

 

Thesecond step of the impairment test, used to measure the amount of impairmentloss, compares the implied fair value of the reporting unit goodwill with thecarrying amount of that goodwill. If the carrying amount of the reporting unitgoodwill exceeds the implied fair value of the goodwill, the impairment lossshall be recognized as an operating expense in an amount equal to that excess.

 

Forthe six months ended June 30, 2009 and 2008, we concluded there were nofactors that would require an interim impairment goodwill test. We did concludeduring our evaluation at December 31, 2008 that we had impaired goodwilland we recorded non-cash charges of $36.5 million and $1.6 million for ourfinancial institution segment and our retail management segment, respectively.

 

Ourannual impairment review and interim review requires extensive use ofaccounting judgment and financial estimates, including projections about ourbusiness, our financial performance, and the performance of the market andoverall economy. Application of alternative assumptions and definitions couldproduce significantly different results. Because of the significance of thejudgments and estimation processes, it is likely that materially differentamounts could be recorded if we used different assumptions or if the underlyingcircumstances were to change.

 

**Off-BalanceSheet Arrangements**

 

Asof June 30, 2009 and as of the date of this report, we did not have anyoff-balance sheet arrangements as defined by Item 303(a)(4) of RegulationS-K.

 

**Item 4T. Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

Goldleaf,with the participation of our principal executive and financial officers, hasevaluated the effectiveness of our disclosure controls and procedures, as suchterm is defined under Rules 13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended, as of June 30,2009. Based on this evaluation, the principal executive and financial officershave determined that such disclosure controls and procedures are effective toensure that information required to be disclosed in our filings under the 

 

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SecuritiesExchange Act of 1934 is recorded, processed, summarized, and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**Changes in Internal Control over Financial Reporting**

 

Therehas been no change in our internal control over financial reporting that hasoccurred during the quarter ended June 30, 2009 that has materially affected,or is reasonably likely to materially affect our internal control overfinancial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1A. Risk Factors.**

 

Therehas been no material changes in the Risk Factors described in our Annual Reporton Form 10-K for the year ended December 31, 2008, other than as described below.

 

***Our secured indebtedness could adversely affect our business and limitour ability to effectively operate our business, and we may be unable togenerate sufficient cash flow to satisfy our liquidity needs.***

 

Asof June 30, 2009, our outstanding secured indebtedness was $42.5 million,which matures in January 2010.  Ourleverage could limit our ability to obtain additional financing to fund futureworking capital, expose us to interest rate risk, require that a portion of ourcash flow from operations be dedicated to the payment of the principal andinterest on our debt, thereby reducing funds available for future operations oracquisitions, and potentially limit our ability to take advantage of significantbusiness opportunities and to react to changes in market or industryconditions.

 

Oursenior credit facility requires us to meet various covenants, includingfinancial covenants, some of which are dependent upon the extent of ourleverage. We will depend primarily on operations to fund our expenses and topay the principal and interest on our outstanding debt.  Our ability to meet our expenses, comply withour financial covenants and reduce our outstanding debt depends on our futureperformance, which could be affected by financial, business, economic,competitive, legislative, and regulatory and other factors, many of which arebeyond our control.  If we are unable torefinance, extend or repay our senior debt by its maturity in January 2010,or sooner if we fail to comply with our various covenants and are unable toobtain a waiver, our lenders would have the right to demand payment andexercise all remedies set forth in their respective agreements or they couldrequire us to sell assets, raise capital or borrow additional funds, each ofwhich would have a material adverse effect on our liquidity, financialcondition, and the value of our common stock. While we have been in discussions with our lenders concerning thereplacement of our senior secured credit facility, there can be no assurancethat such replacement facility will be available at all or on terms that areacceptable to our company.

 

***The failure to raise the market price of our common stockmay affect our ability to remain a publicly-traded company.***

 

The minimum bid price forour publicly traded common stock has remained below $1.00 for a significantperiod of time during late 2008 and throughout 2009. Although Nasdaq hadsuspended its minimum bid requirement in October 2008, Nasdaq lifted thatsuspension on August 3, 2009.   Ifthe minimum bid price for our stock does not rise above $1.00 in the nearfuture or if we fail to meet any other listing requirement of the Nasdaq GlobalMarket, our common stock may be delisted from the Nasdaq Global Market, whichwould negatively affect the value of our common stock.

 

***Failure to complete the proposed merger could negatively affect us.***

 

OnAugust 16, 2009, we entered into a merger agreement with Jack Henry &Associates, Inc.. There is no assurance that the merger agreement and the mergerwill be approved by our shareholders, and there is no assurance that the otherconditions to the completion of the merger will be satisfied. In connectionwith the merger, we will be subject to several risks, including the following:

 

·                  the currentmarket price of our common stock may reflect a market assumption that the mergerwill occur, and a failure to complete the merger could result in a decline inthe market price of our common stock;

 

·                  we may not beable to obtain a waiver from our senior lenders if we are out of compliancewith our covenants in future periods, the pricing for our outstanding debtunder our credit facility may be increased, or our ability to borrow additionalfunds under our credit facility may be reduced;

 

·                  certain costsrelating to the merger, such as legal, accounting and financial advisory fees,are payable by us whether or not the merger is completed;

 

·                  under certaincircumstances, if the merger is not completed, we may be required to pay JackHenry a termination fee of up to $1.5 million;

 

·                  there may besubstantial disruption to our business and a distraction of our management andemployees from day-to-day operations, because matters related to the merger mayrequire substantial commitments of their time and resources;

 

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·                  uncertaintyabout the effect of the merger may adversely affect our relationships with ouremployees, suppliers and other persons with whom we have businessrelationships; and

 

·                  there may belawsuits filed against us relating to the merger

 

If we are unable to complete the proposed merger with Jack Henry &Associates, Inc., we would need to refinance our debt. Our ability to continueas a going concern would be contingent upon our ability to secure financing.There can be no assurances that refinancing would be available to us at all oron favorable terms.

 

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

 

Our 2009 annual meeting of the shareholders was held on May 21, atwhich two proposals were presented to our shareholders for their approval: toelect three Class 1 directors, to hold office for a three-year term anduntil their successors have been duly elected and qualified; and to approve theAmended and Restated Goldleaf Financial Solutions, Inc. 2005 Long-TermIncentive Plan.

 

At the meeting, the re-election of Lawrence A. Hough, Robert A. McCabe, Jr.,and John D. Schneider was approved.  Thevotes cast for the re-election were as follows:

 
| ** **            | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-----------------------|------------|---------------|------------|--------------------|------------|
| Lawrence A. Hough     |       | 16,604,944    |       | 1,687,894          |       |
| Robert A. McCabe, Jr. |       | 14,403,932    |       | 3,888,906          |       |
| John D. Schneider     |       | 12,355,937    |       | 5,936,901          |       |

 

At the meeting, the proposals for the Amended and Restated GoldleafFinancial Solutions, Inc. 2005 Long-Term Incentive Plan wereapproved.  The votes cast for theincentive plan were as follows:

 
| ** **                                                               | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstain** | ** ** |
|--------------------------------------------------------------------------|------------|---------------|------------|-------------------|------------|-------------|------------|
|                                                                     |       |          |       |              |       |        |       |
| Approval of Third Amendment to the 2005  Long-term Equity Incentive Plan |       | 8,028,936     |       | 7,262,474         |       | 8,340       |       |

 

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**Item 6. Exhibits.**

Theexhibits described in the following Index to Exhibits are filed as part of thisquarterly report on Form 10-Q.

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                      |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                            |
| 2.1         |       | Agreement and Plan of  Merger by and among Jack Henry & Associates, Inc., Peachtree  Acquisition Corporation, and Goldleaf Financial Solutions, Inc. dated  August 16, 2009.                                                            |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1         |       | Amended and Restated  Charter of the Company (incorporated by reference to Exhibit 3.1 of  Amendment No. 1 to the Company’s Registration Statement on Form S-1  (File No. 33375013) filed with the SEC on May 3, 1999).           |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1.1       |       | Charter Amendment dated  August 9, 2001 (incorporated by reference to Exhibit 3.3 of the  Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001).                                                          |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1.2       |       | Charter Amendment dated  August 9, 2001 (incorporated by reference to Exhibit 3.4 of the  Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001).                                                          |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1.3       |       | Charter Amendment dated  January 16, 2004 (incorporated by reference to Exhibit B of the  Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on  December 29, 2003).                                                   |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1.4       |       | Charter Amendment dated  January 23, 2006 (incorporated by reference to Exhibit 3.1 to the  Company’s Current Report on Form 8-K filed with the SEC on  January 26, 2006).                                                             |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1.5       |       | Charter Amendment dated  January 24, 2006 (incorporated by reference to Exhibit 3.2 to the  Company’s Current Report on Form 8-K with the SEC on January 26,  2006).                                                                   |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1.6       |       | Charter Amendment dated  May 4, 2006 and effective May 5, 2006 (incorporated by reference to  Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with  the SEC on May 10, 2006).                                       |
|        |       |                                                                                                                                                                                                                                                            |
| 3.1.7       |       | Charter Amendment dated  September 8, 2006 (incorporated by reference to Exhibit 3.1 of the  Company’s Current Report on Form 8-K filed with the SEC on  September 8, 2006).                                                           |
|        |       |                                                                                                                                                                                                                                                            |
| 3.2         |       | Second Amended and Restated  Bylaws of the Company incorporated by reference to Exhibit 3.2 of  Amendment No. 1 to the Company’s Registration Statement on Form S-1  (File No. 333-722;75013) filed with the SEC on May 3, 1999). |
|        |       |                                                                                                                                                                                                                                                            |
| 3.2.1       |       | Bylaws Amendment dated  January 20, 2004 (incorporated by reference to Exhibit 3.2.1 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 2003).                                                              |
|        |       |                                                                                                                                                                                                                                                            |
| 3.2.2       |       | Amendment to Second  Amended and Restated Bylaws Dated November 7, 2007 (incorporated by  reference to Exhibit 3.1 to the Company’s Current Report on  Form 8-K filed with the SEC on November 8, 2007).                               |
|        |       |                                                                                                                                                                                                                                                            |
| 10.1        |       | Amended and Restated  2005 Long-Term Equity Incentive Plan (incorporated by reference to  Annex A to the Company’s Definitive Proxy Statement on Schedule 14A  filed with the SEC on April 22, 2009).                                       |
|        |       |                                                                                                                                                                                                                                                            |
| 10.2        |       | Fourth Amendment to  Credit Agreement, Consent and Waiver dated August 14, 2009 among  Goldleaf Financial Solutions, Inc., and the Lenders party hereto and  Bank of America, N.A.                                                                    |
|        |       |                                                                                                                                                                                                                                                            |
| 10.3        |       | Payment Waiver Agreement  dated August 16, 2009 by and between Goldleaf Financial  Solutions, Inc., and G. Lynn Boggs.                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                            |
| 10.4        |       | First Amendment to our  Change in Control Severance Pay Agreement dated August 16, 2009 by and  between Goldleaf Financial Solutions, Inc., and Dan Owens.                                                                                            |
|        |       |                                                                                                                                                                                                                                                            |
| 31.1        |       | Certification pursuant  to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 — Chief Executive Officer.                                                                                          |
|        |       |                                                                                                                                                                                                                                                            |
| 31.2        |       | Certification pursuant  to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 — Chief Financial Officer.                                                                                          |
|        |       |                                                                                                                                                                                                                                                            |
| 32.1        |       | Certification pursuant  to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 — Chief Executive Officer.                                                                                          |
|        |       |                                                                                                                                                                                                                                                            |
| 32.2        |       | Certification pursuant  to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 — Chief Financial Officer.                                                                                          |

 

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Tableof Contents

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** **                  | **Goldleaf  Financial Solutions, Inc.**  |
|-----------------------------|-----------------------------------------------|
|                        | (Registrant)                                  |
|                        |                                          |
| Date:  August 19, 2009 | /s/  G. Lynn Boggs                            |
|                        | G.  Lynn Boggs                                |
|                        | Chief  Executive Officer                      |
|                        | (Principal  Executive Officer)                |
|                        |                                          |
| Date:  August 19, 2009 | /s/  Dan Owens                                |
|                        | Daniel  Owens                                 |
|                        | Chief  Financial Officer                      |
|                        | (Principal  Financial and Accounting Officer) |

 

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