##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2006
Commission file number 000-25959
 Goldleaf Financial Solutions, Inc.
 (Exact name of registrant as specified in its charter)
 Tennessee
    
    62-1453841(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)9020 Overlook Blvd., Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 221-8400
(Registrants telephone number, including area code)
  þ o
  o o þ
  o þ
  Class
    
    Outstanding as of July 31, 2006Common Stock, no par value
    
    15,816,452 shares




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##### 



GOLDLEAF FINANCIAL SOLUTIONS, INC.
Form 10-Q
For Quarter Ended June 30, 2006
 INDEX
 PageNo.Part I  Financial InformationItem 1 Financial Statements:Unaudited Interim Consolidated Financial DataUnaudited
Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Unaudited Consolidated Statements of Operations for the Three Months Ended
June 30, 2006 and 2005
    
    
    4Unaudited Consolidated Statements of Operations for the Six Months Ended June
30, 2006 and 2005
    
    
    5Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2006 and 2005
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    8Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4 Controls and Procedures
    
    
    30Part II  Other InformationItem 1A Risk Factors
    
    
    32Item 4 Submission of Matters to a Vote of Securityholders
    
    
    32Item 6 Exhibits
    
    
    33Signatures
    
    
    35EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  2




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 June 30, 2006
    
    
    December 31, 2005(Unaudited)
    
    
    (Audited)(in thousands, except share data)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    710
    
    
    $
    137Restricted cash
    
    
    9,915
    
    
    
    50Accounts receivabletrade, net of allowance for doubtful accounts of $364 and
$206, respectively
    
    
    5,561
    
    
    
    4,773Accounts receivableother
    
    
    262
    
    
    
    26Deferred tax assets
    
    
    637
    
    
    
    370Investment in direct financing leases
    
    
    1,916
    
    
    
    2,235Prepaid and other current assets
    
    
    1,950
    
    
    
    1,567Total current assets
    
    
    20,951
    
    
    
    9,158Property and equipment, net
    
    
    3,641
    
    
    
    2,187Operating lease equipment, net
    
    
    111
    
    
    
    187Other assets:Software development costs, net
    
    
    2,214
    
    
    
    1,618Deferred tax assets
    
    
    1,726
    
    
    
    1,456Investment in direct financing leases, net of current portion
    
    
    4,281
    
    
    
    4,642Intangible and other assets, net
    
    
    17,009
    
    
    
    4,931Goodwill
    
    
    24,650
    
    
    
    12,378Total other assets
    
    
    49,880
    
    
    
    25,025Total assets
    
    $
    74,583
    
    
    $
    36,557Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    4,372
    
    
    $
    2,535Accrued liabilities
    
    
    3,960
    
    
    
    1,582Dividends payable
    
    
    605
    
    
    
    Deferred revenue
    
    
    2,923
    
    
    
    456Customer deposits
    
    
    9,865
    
    
    
    Current portion of capital lease obligations
    
    
    286
    
    
    
    Current portion of non-recourse lease notes payable
    
    
    2,046
    
    
    
    2,336Note payable
    
    
    650
    
    
    
    Current portion of long-term debt
    
    
    6,000
    
    
    
    Total current liabilities
    
    
    30,707
    
    
    
    6,909Revolving line of credit
    
    
    550
    
    
    
    Non-recourse lease notes payable, net of current portion
    
    
    3,768
    
    
    
    4,056Deferred revenue
    
    
    2,594
    
    
    
    Capital lease obligations, net of current portion
    
    
    1,165
    
    
    
    Other non-current liabilities
    
    
    105
    
    
    
    230Long-term debt, net of current portion
    
    
    9,750
    
    
    
    Senior subordinated long-term debt, net of unamortized discount of $1,491
    
    
    
    
    
    
    8,509Preferred Stock, Series C redeemable, no par value, 10,000 shares issued and
outstanding; net of unamortized discount of $1,340
    
    
    8,660
    
    
    
    Total liabilities
    
    
    57,299
    
    
    
    19,704Commitments and ContingenciesStockholders Equity:Common stock, no par value; 100,000,000 shares authorized; shares issued and
outstanding, 15,816,452 and 15,489,454, respectively
    
    
    
    
    
    
    Preferred Stock, 20,000,000 shares authorized:Series A non-convertible, no par value; 21,012.5 and 20,000 shares issued
and outstanding, respectively
    
    
    6,796
    
    
    
    6,209Series B convertible, no par value; 40,031 shares issued and outstanding
    
    
    114
    
    
    
    114Additional paid-in capital
    
    
    8,236
    
    
    
    6,998Retained earnings
    
    
    2,138
    
    
    
    3,532Total Stockholders Equity
    
    
    17,284
    
    
    
    16,853Total Liabilities and Stockholders Equity
    
    $
    74,583
    
    
    $
    36,557
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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
For the Three Months Ended June 30, 2006 and 2005
 2006
    
    
    2005(in thousands, exceptper share data)Revenues:Financial institution service fees
    
    $
    11,308
    
    
    $
    7,215Retail inventory management services
    
    
    2,028
    
    
    
    2,193Other products and services
    
    
    762
    
    
    
    93Total revenues
    
    
    14,098
    
    
    
    9,501Cost of Revenues:Financial institution service fees
    
    
    2,338
    
    
    
    627Retail inventory management services
    
    
    236
    
    
    
    238Gross profit
    
    
    11,524
    
    
    
    8,636Operating Expenses:General and administrative
    
    
    4,898
    
    
    
    2,820Selling and marketing
    
    
    4,914
    
    
    
    4,497Research and development
    
    
    360
    
    
    
    60Amortization
    
    
    636
    
    
    
    82Other operating expense, net
    
    
    15
    
    
    
    19Total operating expenses
    
    
    10,823
    
    
    
    7,478Operating Income
    
    
    701
    
    
    
    1,158Interest Expense, Net
    
    
    (917
    )
    
    
    (70
    )(Loss) Income Before Income Taxes
    
    
    (216
    )
    
    
    1,088Income tax (benefit) provision
    
    
    (86
    )
    
    
    423Net (Loss) Income
    
    
    (130
    )
    
    
    665Preferred stock dividends
    
    
    565
    
    
    
    540Net (Loss) Income Available to Common Shareholders
    
    $
    (695
    )
    
    $
    125(Loss) Earnings Per Share:Basic
    
    $
    (0.04
    )
    
    $
    0.01Diluted
    
    $
    (0.04
    )
    
    $
    0.01Weighted Average Common Shares Outstanding:Basic
    
    
    15,812
    
    
    
    14,662Diluted
    
    
    15,812
    
    
    
    14,954
  4




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##### Table of Contents



GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
For the Six Months Ended June 30, 2006 and 2005
 2006
    
    
    2005(in thousands, exceptper share data)Revenues:Financial institution service fees
    
    $
    21,520
    
    
    $
    14,175Retail inventory management services
    
    
    4,123
    
    
    
    4,395Other products and services
    
    
    1,486
    
    
    
    130Total revenues
    
    
    27,129
    
    
    
    18,700Cost of Revenues:Financial institution service fees
    
    
    3,812
    
    
    
    1,168Retail inventory management services
    
    
    483
    
    
    
    525Gross profit
    
    
    22,834
    
    
    
    17,007Operating Expenses:General and administrative
    
    
    9,911
    
    
    
    5,974Selling and marketing
    
    
    9,974
    
    
    
    8,872Research and development
    
    
    607
    
    
    
    128Amortization
    
    
    1,099
    
    
    
    163Other operating expense, net
    
    
    124
    
    
    
    19Total operating expenses
    
    
    21,715
    
    
    
    15,156Operating Income
    
    
    1,119
    
    
    
    1,851Interest Expense, Net
    
    
    (1,572
    )
    
    
    (140
    )(Loss) Income Before Income Taxes
    
    
    (453
    )
    
    
    1,711Income tax (benefit) provision
    
    
    (177
    )
    
    
    667Net (Loss) Income
    
    
    (276
    )
    
    
    1,044Preferred stock dividends
    
    
    1,118
    
    
    
    1,080Net Loss Available to Common Shareholders
    
    $
    (1,394
    )
    
    $
    (36
    )Loss Per Share:Basic
    
    $
    (0.09
    )
    
    $
    (0.00
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.00
    )Weighted Average Common Shares Outstanding:Basic
    
    
    15,770
    
    
    
    14,618Diluted
    
    
    15,770
    
    
    
    14,618
  5




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED  For the Six Months Ended June 30, 2006 and 2005
 2006
    
    
    2005(in thousands)Cash Flows From Operating Activities:Net income (loss)
    
    $
    (276
    )
    
    $
    1,044Adjustments to reconcile net income (loss) to net cash provided by operating activities:Write-off of debt issuance costs
    
    
    118
    
    
    
    Depreciation and amortization
    
    
    2,080
    
    
    
    1,015Depreciation on fixed assets under operating leases
    
    
    71
    
    
    
    Deferred taxes
    
    
    (365
    )
    
    
    616Amortization of debt issuance costs and discount
    
    
    321
    
    
    
    48Stock option compensation expense
    
    
    340
    
    
    
    Deferred gain on land sale
    
    
    (8
    )
    
    
    (8
    )Loss on write-down or disposal of fixed assets and software development costs
    
    
    36
    
    
    
    3Amortization of lease income and initial direct costs
    
    
    (307
    )
    
    
    Gain on sale of leased equipment
    
    
    (61
    )
    
    
    Gain on sale of other assets
    
    
    (40
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (660
    )
    
    
    (362
    )Prepaid and other current assets
    
    
    (229
    )
    
    
    1Other non-current assets
    
    
    (100
    )
    
    
    Accounts payable
    
    
    554
    
    
    
    (192
    )Accrued liabilities
    
    
    932
    
    
    
    (609
    )Deferred revenue
    
    
    724
    
    
    
    (121
    )Other non-current liabilities
    
    
    (10
    )
    
    
    Net cash provided by operating activities
    
    
    3,120
    
    
    
    1,435Cash Flows From Investing Activities:Acquisition of P.T.C. Banking assets
    
    
    (968
    )
    
    
    Acquisition of Goldleaf Technologies, Inc, net of cash acquired
    
    
    (16,396
    )
    
    
    Investment in direct financing leases
    
    
    (907
    )
    
    
    Lease receivables paid
    
    
    1,638
    
    
    
    Proceeds from lease terminations
    
    
    118
    
    
    
    Proceeds received from sale of other assets
    
    
    62
    
    
    
    Additions to property and equipment
    
    
    (381
    )
    
    
    (206
    )Additions to intangibles and other assets
    
    
    (256
    )
    
    
    (9
    )Software development costs
    
    
    (841
    )
    
    
    (403
    )Payments received on notes receivable
    
    
    45
    
    
    
    29Net cash used in investing activities
    
    
    (17,886
    )
    
    
    (589
    )
  6




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED
For the Six Months Ended June 30, 2006 and 2005
 2006
    
    
    2005(in thousands)Cash Flows From Financing Activities:Repayments on long-term debt
    
    $
    (250
    )
    
    $
    (833
    )Repayments on capital lease obligations
    
    
    (105
    )
    
    
    Proceeds from amended and restated debt facility with Bank of
America, net of issuance costs of $518
    
    
    15,482
    
    
    
    Proceeds from revolving line of credit, net
    
    
    443
    
    
    
    770Repayment of note payable
    
    
    (350
    )Repayments of non-recourse lease financing notes payable
    
    
    (1,176
    )
    
    
    Proceeds from non-recourse lease financing notes payable
    
    
    783
    
    
    
    Proceeds from exercise of employee stock options
    
    
    7
    
    
    
    360Stock issued through employee stock purchase plan
    
    
    5
    
    
    
    18Repurchase of common stock
    
    
    
    
    
    
    (88
    )Receipt of dividends previously paid
    
    
    500
    
    
    
    Payments of preferred dividends declared
    
    
    
    
    
    
    (1,080
    )Net cash provided by (used in) financing activities
    
    
    15,339
    
    
    
    (853
    )Net Change in Cash and Cash Equivalents
    
    
    573
    
    
    
    (7
    )Cash and Cash Equivalents at beginning of year
    
    $
    137
    
    
    
    7Cash and Cash Equivalents at end of period
    
    $
    710
    
    
    $
    0Supplemental Cash Flow Information:Cash payments for income taxes during period
    
    $
    144
    
    
    $
    199Cash payments of interest during period
    
    $
    672
    
    
    $
    100Non-cash Investing Activities:Issuance of 314,768 common shares as purchase consideration in
the Goldleaf Technologies, Inc. and P.T.C. Banking acquisitions
    
    $
    461
    
    
    $
    Issuance of note payable to Goldleaf executive for signing bonus
    
    $
    1,000
    
    
    $
    Payment-in-kind on Series A preferred stock dividend
    
    $
    1,012
    
    
    
    
  7




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##### Table of Contents



GOLDLEAF FINANCIAL SOLUTIONS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
 A. The Company
  B. Summary of Significant Accounting Policies
 Basis of Presentation
    Principles of Consolidation
   Comprehensive Income
 Reporting Comprehensive Income
 Stock-Based Compensation
 Share-Based Payment,
  8




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##### Table of Contents




    
    The expected volatility is estimated based on the historical volatility of the Companys
stock over the contractual life of the options and the Companys expectations regarding
stock volatility in the future.
    
    The Company uses historical data to estimate option exercise and employee termination
behavior within the valuation model; the expected life of options granted is derived from
historical Company experience and represents the period of time the options are expected to
be outstanding.
    
    The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant for periods within the contractual life of the option.
 Six Months Ended June 30,2006
    
    2005Dividend yield range
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    58
    %
    
    
    75
    %Risk-free interest rate range
    
    
    4.31% - 5.08
    %
    
    
    4.00
    %Expected term (in years)
    
    6.2 years
    
    8 years
   Weighted Average
    
    
    RemainingNumber of Shares
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    Intrinsic ValueBalance of December 31, 2005
    
    
    5,363,296
    
    
    $
    2.24Granted
    
    
    1,957,300
    
    
    
    1.36Exercised
    
    
    (7,800
    )
    
    
    0.59Canceled
    
    
    (277,998
    )
    
    
    5.24Balance of June 30, 2006
    
    
    7,034,798
    
    
    $
    1.80
    
    
    8.4 years
    
    
    3,080,331Balance exercisable at June 30, 2006
    
    
    1,581,913
    
    
    $
    3.31
    
    
    5.0 years
    
    
    517,021
   9




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005(In thousands,
    
    
    (In thousands,except per share data)
    
    
    except per share data)Net income (loss)
available to common
shareholders, as
reported
    
    $
    125
    
    
    $
    (36
    )Add (Deduct): Total
stock-based
employee
compensation
expense determined
under the fair
value based method
for all awards, net
of related tax
effects
    
    
    250
    
    
    
    243Pro forma net income
    
    $
    375
    
    
    $
    207Income per share:Basic as reported
    
    $
    0.01
    
    
    $
    0.00Basic pro forma
    
    $
    0.03
    
    
    $
    0.01Diluted as reported
    
    $
    0.01
    
    
    $
    0.00Diluted pro forma
    
    $
    0.03
    
    
    $
    0.01
 New Accounting Pronouncement
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
  C. Reclassifications
   D. Acquisitions
 Assets of P.T.C. Banking Systems, Inc.
 Business Combinations
 10




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##### Table of Contents



(In thousands, except per share amounts)Purchase Price:Cash
    
    $
    949Common shares (42,427 shares valued at $1.46 per share)
    
    
    62Direct costs of acquisition
    
    
    19Total purchase price
    
    $
    1,030Value assigned to assets and liabilities:Assets:Current assets
    
    $
    10Property and equipment
    
    
    15Customer list (estimated life of ten years)
    
    
    53Acquired technology (estimated life of five years)
    
    
    280Non-compete (estimated life of three years)
    
    
    375Goodwill
    
    
    461Liabilities:Accounts payable
    
    
    14Accrued liabilities
    
    
    10Deferred revenue
    
    
    140Total net assets
    
    $
    1,030
  Goldleaf Technologies, Inc.
 Business Combinations
 (In thousands except share amounts)Purchase Price:Cash (includes $830,000 paid to executives considered as purchase price)
    
    $
    17,615Note payable to executive
    
    
    1,000Common shares (272,341 shares valued at $1.47 per share)
    
    
    400Direct acquisition costs
    
    
    186Total purchase price
    
    $
    19,201Value assigned to assets and liabilities:Assets:Cash
    
    $
    1,405Restricted cash
    
    
    11,258Accounts receivable
    
    
    466Other current assets
    
    
    156Property and equipment
    
    
    1,811Deferred tax asset
    
    
    171Customer list (estimated life of ten years)
    
    
    3,290Acquired technology (estimated life of seven years)
    
    
    3,090Trademarks/tradenames (indefinite life)
    
    
    4,470Non-compete (estimated life of three years)
    
    
    1,300Goodwill
    
    
    11,510Liabilities:Accounts payable
    
    
    1,176Accrued liabilities
    
    
    1,545Customer deposits
    
    
    11,258Capital lease obligations
    
    
    1,557Deferred revenue
    
    
    4,190Total net assets
    
    $
    19,201
 11




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##### Table of Contents



ACH Manager and Client (ACH) and Remote Deposit Revenue
 Revenue Arrangements with Multiple Deliverables.
 Application of AICPA
SOP 97-2, Software Revenue Recognition, to Arrangements That Include the Right to Use Software
Stored on Another Entitys Hardware, Software Revenue Recognition
   Website Design and Hosting
  E. Debt
  March 31, and June 30, 2006
    
    $250,000/quarterSeptember 30 and December 31, 2006
    
    $500,000/quarterThereafter (until maturity)
    
    $750,000/quarter
  12




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##### Table of Contents



Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,
  
    
    an additional 500 shares of Series A preferred stock to Lightyear in lieu of $500,000
in cash dividends that became due on January 1, 2006 on the Series a preferred stock;
    
    an additional 512.5 shares of Series A preferred stock to Lightyear in lieu of $512,500
in cash dividends that became due on April 1, 2006 on the Series A preferred stock; and
    
    warrants to Lightyear that give Lightyear the right to purchase 767,045 shares of our
common stock at an exercise price of $1.32 per share.
   13




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##### Table of Contents



F. Net Income (Loss) Per Share
   Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Net (loss) income available to common shareholders
    
    $
    (695
    )
    
    $
    125
    
    
    $
    (1,394
    )
    
    $
    (36
    )Weighted average common shares outstanding
    
    
    15,812
    
    
    
    14,662
    
    
    
    15,770
    
    
    
    14,618Plus additional shares from common stock
equivalent shares:Options, warrants, and convertible preferred stock
    
    
    
    
    
    
    292
    
    
    
    
    
    
    
    Diluted weighted average common shares outstanding
    
    
    15,812
    
    
    
    14,954
    
    
    
    15,770
    
    
    
    14,618
  G. Legal Proceedings
  H. Segment Information
 Disclosures about Segments of
an Enterprise and Related Information.
 14




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##### Table of Contents



Three Months Ended June 30, 2006
    
    
    Three Months Ended June 30, 2005Retail
    
    
    
    
    
    
    
    
    
    
    RetailFinancial
    
    
    Inventory
    
    
    
    
    
    
    Financial
    
    
    InventoryInstitution
    
    
    Management
    
    
    
    
    
    
    Institution
    
    
    ManagementService Fees
    
    
    Services
    
    
    Total
    
    
    Service Fees
    
    
    Services
    
    
    Total(In thousands)Revenues
    
    $
    12,070
    
    
    $
    2,028
    
    
    $
    14,098
    
    
    $
    7,308
    
    
    $
    2,193
    
    
    $
    9,501Cost of revenues
    
    
    2,338
    
    
    
    236
    
    
    
    2, 574
    
    
    
    627
    
    
    
    238
    
    
    
    865Gross profit
    
    
    9,732
    
    
    
    1,792
    
    
    
    11,524
    
    
    
    6,681
    
    
    
    1,955
    
    
    
    8,636(Loss)
income before
taxes
    
    
    (636
    )
    
    
    420
    
    
    
    (216
    )
    
    
    663
    
    
    
    425
    
    
    
    1,088Assets
    
    
    71,131
    
    
    
    3,452
    
    
    
    74,583
    
    
    
    16,612
    
    
    
    3,944
    
    
    
    20,556Total
expenditures
for additions
to long-lived
assets
    
    $
    663
    
    
    $
    
    
    
    $
    663
    
    
    $
    390
    
    
    $
    9
    
    
    $
    399Goodwill
    
    $
    23,150
    
    
    $
    1,500
    
    
    $
    24,650
    
    
    $
    10,878
    
    
    $
    1,500
    
    
    $
    12,378
 Six Months Ended June 30, 2006
    
    
    Six Months Ended June 30, 2005Retail
    
    
    
    
    
    
    
    
    
    
    RetailFinancial
    
    
    Inventory
    
    
    
    
    
    
    Financial
    
    
    InventoryInstitution
    
    
    Management
    
    
    
    
    
    
    Institution
    
    
    ManagementService Fees
    
    
    Services
    
    
    Total
    
    
    Service Fees
    
    
    Services
    
    
    Total(In thousands)Revenues
    
    $
    23,006
    
    
    $
    4,123
    
    
    $
    27,129
    
    
    $
    14,305
    
    
    $
    4,395
    
    
    $
    18,700Cost of revenues
    
    
    3,812
    
    
    
    483
    
    
    
    4,295
    
    
    
    1,168
    
    
    
    525
    
    
    
    1,693Gross profit
    
    
    19,194
    
    
    
    3,640
    
    
    
    22,834
    
    
    
    13,137
    
    
    
    3,870
    
    
    
    17,007(Loss) income before
taxes
    
    
    (1,265
    )
    
    
    812
    
    
    
    (453
    )
    
    
    1,009
    
    
    
    702
    
    
    
    1,711Assets
    
    
    71,131
    
    
    
    3,452
    
    
    
    74,583
    
    
    
    16,612
    
    
    
    3,944
    
    
    
    20,556Total expenditures
for additions to
long-lived assets
    
    $
    1,466
    
    
    $
    12
    
    
    $
    1,478
    
    
    $
    609
    
    
    $
    9
    
    
    $
    618Goodwill
    
    $
    23,150
    
    
    $
    1,500
    
    
    $
    24,650
    
    
    $
    10,878
    
    
    $
    1,500
    
    
    $
    12,378
 I. Stock Option Grants
  15




---



##### Table of Contents



J. Supplemental Unaudited Pro Forma Financial Data
  Unaudited Pro Forma Statement of OperationsFor The Six Months Ended June 30, 2006UnauditedPro FormaAdjustmentsGoldleaf
    
    
    GTI
    
    
    Debit
    
    
    Credit
    
    
    Total(In thousands, except per share data)Revenues
    
    $
    27,129
    
    
    $
    1,014
    
    A
    $
    41
    
    
    
    
    
    
    $
    28,102B
    
    100Operating expenses
    
    
    26,010
    
    
    
    1,010
    
    C

    
    6
    
    
    
    
    
    
    
    27,126Operating income
    
    
    1,119
    
    
    
    4
    
    
    
    (147
    )
    
    
    
    
    
    
    976Interest expense, net
    
    
    1,572
    
    
    
    0
    
    D
    
    87
    
    
    
    
    
    
    
    1,659Income (loss) before provision (benefit)
for income taxes
    
    
    (453
    )
    
    
    4
    
    
    
    (234
    )
    
    
    
    
    
    
    (683
    )Income tax benefit
    
    
    (177
    )
    
    
    0
    
    
    
    
    
    E
    
    96
    
    
    
    (273
    )Net loss
    
    
    (276
    )
    
    
    4
    
    
    
    (234
    )
    
    
    96
    
    
    
    (410
    )Preferred dividends
    
    
    1,118
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,118Net loss available to common shareholders
    
    $
    (1,394
    )
    
    $
    4
    
    
    
    (234
    )
    E
    
    96
    
    
    $
    (1,528
    )Diluted earnings (loss) per share
    
    $
    (0.09
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.10
    )
 Unaudited Pro Forma Statement of OperationsFor The Year Ended December 31, 2005UnauditedPro Forma AdjustmentsKVI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ProGoldleaf
    
    
    Captiva
    
    
    Capital
    
    
    GTI
    
    
    Debit
    
    
    Credit
    
    
    Format(In thousands, except per share data)Revenues
    
    $
    38,351
    
    
    $
    1,713
    
    
    $
    816
    
    
    $
    9,412
    
    A
    $
    917
    
    
    $
    
    
    
    $
    49,375B
    
    1,276Operating expenses
    
    
    34,276
    
    
    
    2,289
    
    
    
    950
    
    
    
    10,721
    
    C
    
    468
    
    
    
    
    
    
    
    49,980Operating income (loss)
    
    
    4,075
    
    
    
    (576
    )
    
    
    (134
    )
    
    
    (1,309
    )
    
    
    (2,661
    )
    
    
    
    
    
    
    (605
    )Interest expense, net
    
    
    381
    
    
    
    164
    
    
    
    
    
    
    
    (39
    )
    D
    
    2,369
    
    
    
    
    
    
    
    2,875Income (loss)
before provision for
income taxes
    
    
    3,694
    
    
    
    (740
    )
    
    
    (134
    )
    
    
    (1,270
    )
    
    
    (5,030
    )
    
    
    
    
    
    
    (3,480
    )Provision (benefit) for
income taxes
    
    
    1,359
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    E
    
    2,716
    
    
    
    (1,357
    )Net income (loss)
    
    
    2,335
    
    
    
    (740
    )
    
    
    (134
    )
    
    
    (1,270
    )
    
    
    (5,030
    )
    
    
    2,716
    
    
    
    (2,123
    )Preferred stock dividends
    
    
    2,160
    
    
    
    
    
    
    
    
    
    
    
    2,915
    
    
    
    
    
    F
    
    2,915
    
    
    
    2,160Net income (loss)
attributable to common
shareholders
    
    $
    175
    
    
    $
    (740
    )
    
    $
    (134
    )
    
    $
    (4,185
    )
    
    
    (5,030
    )
    
    $
    5,631
    
    
    $
    (4,283
    )Diluted earnings
(loss) per share
    
    $
    0.01
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.27
    )
   
 A.
    
    To reduce revenues for GTI related to estimated deferred revenues that
would not have been realized had we acquired GTI as of January 1, 2005
and recorded the deferred service obligation at its estimated fair
value as of that date. 16




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##### Table of Contents



B.
    
    To increase amortization expense of new intangibles recorded as a result of the acquisitions.
For 2006, the pro forma amounts assume that the Company recorded approximately $12.2 million of
identified intangibles, consisting of acquired technology ($3.1 million), customer lists ($3.3
million), non-compete agreements ($1.3 million), and tradenames and trademarks ($4.5 million),
and that the Company amortizes these amounts over estimated useful lives of seven, ten, three,
and indefinite years, respectively. For 2005, the pro forma amounts assume that the Company
recorded approximately $15.3 million of identified intangibles, consisting of acquired
technology ($3.9 million), customer lists ($4.9 million), vendor program ($0.1 million),
non-compete agreements ($2.0 million), and tradenames and trademarks ($4.5 million), and that
the Company amortizes these amounts over estimated average useful lives of five, ten, seven,
three, and indefinite, years, respectively.C.
    
    To increase general and administrative costs for the increased salary of the Companys new chief
executive officer and executive officers of KVI Capital and GTI based on the employment
agreements executed as part of these acquisitions.D.
    
    To increase interest expense for additional debt we acquired to fund the purchase prices of KVI
Capital, Captiva and GTI. The Company has estimated interest expense assuming a weighted
average interest rate for the two debt instruments used to complete the transactions: the $10.0
million Lightyear Series C redeemable preferred stock at 10% (as received in exchange for a
$10.0 million subordinated note we originally issued) and the $18.0 million Bank of America
credit facility. Therefore, the pro forma interest expense was calculated using an interest
rate of 7.5% (2006) and 8.3% (2005) and includes accretion of the debt discount (related to
common stock warrants issued to Lightyear in connection with the $10.0 million financing ) using
the effective interest method.E.
    
    To record income tax effects of the pro forma adjustments at the Companys effective rate of 39%.F.
    
    To reduce preferred dividends for the elimination of GTI dividends ($2.9 million in 2005). As a
result of our acquisition of Goldleaf Technologies, it no longer has a preferred stockholder.
Therefore, on a pro forma basis, no preferred stock dividends would have existed in 2005 related
to Goldleaf Technologies.    K. Related Party Transaction
  17




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##### Table of Contents



L. Subsequent Events
  
    
    an additional 525.3 shares of Series A preferred stock to Lightyear in lieu of $525,300
in cash dividends that became due on July 1, 2006 on the Series A preferred stock; and
    
    warrants to Lightyear that give Lightyear the right to purchase 397,964 shares of our
common stock at an exercise price of $1.32 per share.
 18




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
Three and Six Months Ended June 30, 2006 and 2005
 Note Regarding Forward Looking Information
   Overview
  
    
    growing competition with larger national and regional banks;
    
    the emergence of non-traditional competitors;
    
    the compression of margins on traditional products;
    
    the convergence of financial products into a single institution; and
    
    legislative changes accelerating the need for financial institutions to offer a wider
range of products and services to their customers.
    19




---



##### Table of Contents




    
    Captiva, which added core data processing as well as image and item processing;
    
    P.T.C., which added teller automation systems; and
    
    Goldleaf Technologies, which added ACH processing, remote capture processing, and website design and hosting.
   Revenues
  
    
    financial institution service fees;
    
    retail inventory management services; and
    
    other products and services.
 Financial Institution Service Fees
  
    
    participation fees and insurance brokerage fees;
    
    core data processing and image processing fees;
    
    software license and maintenance fees;
    
    ACH origination and processing fees;
    
    remote capture and deposit processing fees;
    
    leasing revenues; and
    
    financial institution website design and hosting fees.
 Participation Fees, Insurance Brokerage Fees and Maintenance Fees from Our Accounts Receivable
Financing Solution.
  20




---



##### Table of Contents



Core Data Processing and Image Processing Fees.
 Software License and Maintenance Fees.
 ACH Origination and Processing, Remote Capture and Deposit Processing Fees.
 Leasing Revenues.
 Financial Institution Website Design and Hosting Fees.
 Retail Inventory Management Services
  Other Products and Services
   21




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##### Table of Contents



Results of Operations
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Revenues:Financial institution service fees
    
    
    75.9
    %
    
    
    80.2
    %
    
    
    75.8
    %
    
    
    79.3
    %Retail inventory management services
    
    
    23.1
    
    
    
    14.4
    
    
    
    23.5
    
    
    
    15.2Other products and services
    
    
    1.0
    
    
    
    5.4
    
    
    
    0.7
    
    
    
    5.5Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Financial institution service fees
    
    
    6.6
    
    
    
    16.6
    
    
    
    6.3
    
    
    
    14.0Retail inventory management services
    
    
    2.5
    
    
    
    1.7
    
    
    
    2.8
    
    
    
    1.8Gross profit
    
    
    90.9
    
    
    
    81.7
    
    
    
    90.9
    
    
    
    84.2Operating expenses:General and administrative
    
    
    29.7
    
    
    
    34.7
    
    
    
    31.9
    
    
    
    36.5Selling and marketing
    
    
    47.3
    
    
    
    34.8
    
    
    
    47.4
    
    
    
    36.8Research and development
    
    
    0.6
    
    
    
    2.6
    
    
    
    0.7
    
    
    
    2.2Amortization
    
    
    0.9
    
    
    
    4.5
    
    
    
    0.9
    
    
    
    4.1Other operating (income) expense, net
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.5Total operating expenses
    
    
    78.7
    
    
    
    76.7
    
    
    
    81.0
    
    
    
    80.1Operating income
    
    
    12.2
    
    
    
    5.0
    
    
    
    9.9
    
    
    
    4.1Interest expense, net
    
    
    0.7
    
    
    
    6.5
    
    
    
    0.7
    
    
    
    5.8Income (loss) before income taxes
    
    
    11.5
    
    
    
    (1.5
    )
    
    
    9.2
    
    
    
    (1.7
    )Income tax provision (benefit)
    
    
    4.5
    
    
    
    (0.6
    )
    
    
    3.6
    
    
    
    (0.6
    )Net income (loss)
    
    
    7.0
    %
    
    
    (0.9
    )%
    
    
    5.6
    %
    
    
    (1.1
    )%
  Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
  Financial Institution Service Fees.
 Retail Inventory Management Services.
 Other Products and Services.
 22




---



##### Table of Contents



Cost of Revenues  financial institution service fees.
 Cost of Revenues  retail inventory management services.
 General and Administrative.
 Selling and Marketing.
 Research and Development.
 Amortization.
 23




---



##### Table of Contents



Other Operating (Income) Expense, Net.
 Operating Income.
 Interest Expense, Net.
 Income Tax (Benefit) Provision.
 Critical Accounting Policies
   Revenue Recognition
  Financial institution service fees.
     24




---



##### Table of Contents



Application of AICPA SOP 97-2, Software Revenue Recognition, to Arrangements That Include the
Right to Use Software Stored on Another Entitys Hardware, Software Revenue Recognition
      25




---



##### Table of Contents



Retail Inventory Management Services
  Other Products and Services
  Software Development Costs
 Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
 Income Taxes
 Accounting for Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 26




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##### Table of Contents



Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 Long-Lived Assets, Intangible Assets and Goodwill
  
    
    significant underperformance relative to expected historical or projected future operating results,
    
    significant changes in the manner of our use of the acquired assets or the strategy for our overall business, and
    
    significant negative industry or economic trends.
  Liquidity and Capital Resources
  Six Months EndedJune 302006
    
    
    2005Net cash provided by operating activities
    
    $
    3,120
    
    
    $
    1,435Net cash used in investing activities
    
    
    (17,886
    )
    
    
    (589
    )Net cash provided by (used in) financing activities
    
    
    15,339
    
    
    
    (853
    )
 Cash from Operating Activities
  Cash from Investing Activities
  27




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##### Table of Contents



Cash from Financing Activities
  Analysis of Changes in Working Capital
   Obligations and Commitments for Future Payments as of June 30, 2006
  Payments Due by PeriodLessThan
    
    
    1-2
    
    
    3-4
    
    
    5 Years &Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    After(In thousands)Revolving line of credit
    
    $
    550
    
    
    $
    
    
    
    $
    550
    
    
    $
    
    
    
    $
    Short-term debt
    
    
    6,000
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    1,451
    
    
    
    286
    
    
    
    415
    
    
    
    750
    
    
    
    Long-term debt
    
    
    9,750
    
    
    
    
    
    
    
    9,750
    
    
    
    
    
    
    
    Non-recourse lease notes payable
    
    
    5,814
    
    
    
    2,046
    
    
    
    1,753
    
    
    
    1,176
    
    
    
    839Operating leases
    
    
    6,424
    
    
    
    1,884
    
    
    
    1,967
    
    
    
    2,563
    
    
    
    10Notes payable
    
    
    650
    
    
    
    650
    
    
    
    
    
    
    
    
    
    
    
    Series C redeemable preferred stock
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    Total contractual cash obligations
    
    $
    40,639
    
    
    $
    10,866
    
    
    $
    14,435
    
    
    $
    14,489
    
    
    $
    849
  Historical Uses of Debt
  28




---



##### Table of Contents




    
    The Lightyear Fund, L.P., an affiliate of Lightyear, guaranteed a $6.0 million term
loan included in the facility that is due September 30, 2006 and we agreed to pay a fee
of $45,000 to The Lightyear Fund, L.P. and to reimburse the Lightyear Fund, L.P. for up
to $50,000 of its expenses in connection with this guaranty;
    
    Lightyear exchanged its senior subordinated $10.0 million note for 10,000 shares of
our Series C preferred stock, which decreased our debt by $10.0 million but added that
same amount in redeemable preferred stock; and
    
    we amended and restated the common stock warrants that we issued to Lightyear in
December 2005 in connection with the Lightyear note.
   Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 Share-Based Payment Accounting for Stock Issued to Employees
 29




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##### Table of Contents



Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
  Seasonality
  Inflation
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  30




---



##### Table of Contents



31




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##### Table of Contents



PART II  Other Information
 
 Item 1A. Risk Factors
  
 Item 4. Submission of Matters to a Vote of Securityholders
       Proposal 1
    
    Votes For
    
    Votes WithheldHough
    
    
    29,346,616
    
    
    
    167,054McCabe
    
    
    29,311,389
    
    
    
    202,281Schneider
    
    
    29,346,616
    
    
    
    167,054
 Proposal 2
    
    Votes For
    
    Votes Against
    
    Abstentions
    
    Broker non-votes29,507,758
    
    
    
    568
    
    
    
    5,344
    
    
    
    Proposal 3
    
    Votes For
    
    Votes Against
    
    Abstentions
    
    Broker non-votes26,613,557
    
    
    
    2,897,733
    
    
    
    2,380
    
    
    
    
 32




---



##### Table of Contents



Item 6. Exhibits
  ExhibitNo.
    
    
    
    Description3.1
    
    
    
    Amended and Restated Charter of the Registrant (incorporated by reference to
Exhibit 3.1 of Amendment No. 1 to the Registrants Registration Statement on
Form S-1 (File No. 333-75013) 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 Registrant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 Registrant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 Registrant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 Registrant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 Registrants Current Report on Form 8-K filed 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 Registrants Current Report on Form 8-K filed
with the SEC on May 10, 2006).3.2
    
    
    
    Second Amended and Restated Bylaws of the Registrant (incorporated by reference
to Exhibit 3.2 of Amendment No. 1 to the Registrants Registration Statement on
Form S-1 (File No. 333-75013) 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 Registrants Annual Report on Form 10-K for the year ended December
31, 2003).10.1
    
    
    
    Warrant certificate dated April 1, 2006 issued by Registrant to Lightyear PBI
Holdings, LLC (incorporated by reference to Exhibit 10.34 of Amendment No. 3 to
the Registrants Registration Statement on Form S-1 (File No. 333-133542) filed
with the SEC on August 2, 2006).10.2
    
    
    
    Second Amendment to Amended and Restated Credit Agreement dated April 5, 2006 by
and among the Registrant, Bank of America, N.A., First Horizon Bank, and The
Peoples Bank (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed with the SEC on April 6, 2006).10.3
    
    
    
    Term C Loan Note dated April 5, 2006 between the Registrant and First Horizon
Bank (incorporated by reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K filed with the SEC on April 6, 2006).10.4
    
    
    
    Term D Loan Note dated April 5, 2006 between the Registrant and The Peoples
Bank (incorporated by reference to Exhibit 10.3 to the Registrants Current
Report on Form 8-K filed with the SEC on April 6, 2006).10.5
    
    
    
    Redemption and Recapitalization Agreement dated April 25, 2006 between the
Registrant and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit
10.38 to the Registrants Registration Statement on Form S-1 (File No.
333-133542) filed with the SEC on April 26, 2006).10.6
    
    
    
    Third Amendment to Amended and Restated Credit Agreement dated May 3, 2006 by
and among the Registrant, Bank of America, N.A., First Horizon Bank, and The
Peoples Bank (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed with the SEC on May 16, 2006).
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##### Table of Contents



ExhibitNo.
    
    
    
    Description10.7
    
    
    
    Fourth Amendment to Amended and Restated Credit Agreement dated June 15, 2006 by
and among the Registrant, Bank of America, N.A., First Horizon Bank, The
Peoples Bank of Winder, and the Bankers Bank of Atlanta, Georgia (incorporated
by reference to Exhibit 10.1 to the Registrants Current Report on Form 8K
filed with the SEC on June 16, 2006.)10.8
    
    
    
    Amendment to Unsecured Promissory Note dated June 15, 2006 issued by Registrant
to Paul McCulloch (incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed with the SEC on June 16, 2006).31.1
    
    
    
    Certification pursuant to Rule 13a  14(a)/15d  14(a)  Chief Executive Officer.31.2
    
    
    
    Certification pursuant to Rule 13a  14(a)/15d  14(a)  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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##### Table of Contents



Signatures
  Goldleaf Financial Solutions, Inc.
(f/k/a Private Business, Inc.)
(Registrant)Date: August 14, 2006
    
    By:
    
    /s/ G. Lynn Boggs

G. Lynn BoggsChief Executive OfficerDate: August 14, 2006
    
    By:
    
    /s/ J. Scott Craighead

J. Scott CraigheadChief Financial Officer