Goldleaf Financial Solutions 10Q/A 2006 Q1 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A

AMENDMENT NO. 5

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2006

Commission file number 000-25959

Goldleaf Financial Solutions, Inc.

(f/k/a Private Business, 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)

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

Yes o

No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one.)

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

Yes o

No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Class		Outstanding as of March 9, 2007

Common Stock, no par value		17,030,628 shares

GOLDLEAF FINANCIAL SOLUTIONS, INC.
Form 10-Q/A
Amendment No. 5
For Quarter Ended March 31, 2006
EXPLANATORY NOTE

Goldleaf Financial Solutions, Inc. filed its Quarterly Report on Form 10-Q for the first quarter of 2006 with the SEC on May 15, 2006. On June 7, 2006, we filed Amendment No. 1 to our Quarterly Report on Form 10-Q for the first quarter of 2006 to conform the disclosure contained in the Quarterly Report on Form 10-Q to the disclosure contained in Amendment No. 1 to our Form S-1 Registration Statement filed June 6, 2006. On August 2, 2006 we filed with the SEC an Amendment No. 2 to our Quarterly Report on Form 10-Q. On August 16, 2006, we filed Amendment No. 3 to our Quarterly Report on Form 10-Q.

As part of our ongoing accounting controls and procedures, we recently determined that certain operating expenses of our wholly-owned subsidiary, Goldleaf Technologies, Inc., in our consolidated statements of operations included in Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006, should have been classified as cost of revenues. We filed Amendment No. 4 to our Quarterly Report on Form 10-Q to reflect this reclassification and to make our disclosure consistent with the disclosure in our amendments to the Registration Statement. We note that while these changes reduce our previously reported gross profit for the three months ended March 31, 2006, they do not affect operating income, net loss or net loss per share.

During our year year-end audit it was determined that all audit fees for audits of the historical periods of KVI Capital and Goldleaf Technologies incurred in the first, second, and third quarters of 2006 should be recorded as period costs rather than capitalized as direct costs of the acquisitions. To reflect this adjustment, we are today filing an amendment to our Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006. Accordingly, to reflect this adjustment in the statements of operations for the three month period, we are filing this Amendment No. 5 to our Quarterly Report for the three months ended March 31, 2006. The adjustment lowers our operating income by $55,000 and increases our net loss available to common shareholders and diluted loss per share by $34,000 and $0.01, respectively, for the three months ended March 31, 2006.

Additionally, on August 8, 2006, the Company's Board of Directors approved a one for five reverse stock split which was affected on September 8, 2006. As a result, the Amendment No. 5 reflects this by adjuting all common share, options, warrants and per share amounts for all prior periods in the accompanying consolidated financial statements.

Amendment No. 5 to our Quarterly Report on Form 10-Q for the first quarter of 2006 amends only the items listed below, and only to reflect the adjustment discussed above. With respect to each item, we are amending the quarterly report to delete the disclosure under that item contained in our Quarterly Report on Form 10-Q, as amended, and to replace it in its entirety with the disclosure contained in this amendment.

INDEX

		Page No.

Part I – Financial Information

Item 1 Financial Statements

Consolidated Balance Sheets Unaudited as of March 31, 2006 and Audited as of December 31, 2005		F-1

Unaudited Consolidated Statements of Operations for the Three Months ended March 31, 2006 and 2005		F-2

Unaudited Consolidated Statements of Cash Flows for the Three Months ended March 31, 2006 and 2005		F-3

Notes to Unaudited Consolidated Financial Statements		F-5

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		1

Part II – Other Information

Item 6 Exhibits		14

Signatures		15
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

Except for the amended information, this Quarterly Report on Form 10-Q/A continues to speak as of the date of the original filing or the subsequent amendment, as applicable, and we have not updated the disclosures contained in this report to reflect events that occurred at a later date unless otherwise noted.

Part I — Financial Information
Item 1 — Financial Statements

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	March 31, 2006		December 31, 2005

	Restated
	(Unaudited)		(Audited)
	(in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents	$	1,360	$	137
Restricted cash		10,336		50
Accounts receivable— trade, net of allowance for doubtful accounts of $304 and $206, respectively		5,312		4,773
Accounts receivable— other		21		26
Deferred tax assets		430		370
Investment in direct financing leases		1,931		2,235
Prepaid and other current assets		1,753		1,567

Total current assets		21,143		9,158

Property and Equipment, Net		3,846		2,187
Operating Lease Equipment, Net		155		187
Other Assets:
Software development costs, net		1,992		1,618
Deferred tax assets		2,723		1,456
Investment in direct financing leases, net of current portion		4,080		4,642
Intangible and other assets, net		15,961		4,931
Goodwill		24,745		12,378

Total other assets		49,501		25,025

Total assets	$	74,645	$	36,557

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	3,805	$	2,535
Accrued liabilities		2,640		1,582
Dividends payable		1,052		—
Deferred revenue		2,926		456
Customer deposits		10,286		—
Current portion of capital lease obligations		258		—
Current portion of non-recourse lease notes payable		2,061		2,336
Note payable		850		—
Current portion of long-term debt		8,000		—

Total current liabilities		31,878		6,909

Revolving Line of Credit		1,600		—
Non-Recourse Lease Notes Payable, net of current portion		3,510		4,056
Deferred Revenue		3,050		—
Capital Lease Obligations, net of current portion		1,257		—
Other Non-Current Liabilities		119		230
Long-Term Debt, net of current portion		7,750		—
Note Payable		150		—
Senior Subordinated Long-Term Debt, net of unamortized discount of $1,491		—		8,509
Preferred Stock, Series C redeemable, no par value, 10,000 shares issued and outstanding; net of unamortized discount of $1,416		8,584		—

Total liabilities		57,898		19,704
Commitments and Contingencies
Stockholders’ Equity:
Common stock, no par value; 100,000,000 shares authorized; shares issued and outstanding, 3,162,290 and 3,097,891, respectively		—		—
Preferred Stock, 20,000,000 shares authorized:
Series A non-convertible, no par value; 20,000 shares issued and outstanding, respectively		6,209		6,209
Series B convertible, no par value; 40,031 shares issued and outstanding		114		114
Additional paid-in capital		7,625		6,998
Retained earnings		2,799		3,532

Total Stockholders’ Equity		16,747		16,853

Total Liabilities and Stockholders’ Equity	$	74,645	$	36,557

The accompanying notes are an integral part of these consolidated financial statements.

F-1

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
For the Three Months Ended March 31, 2006 and 2005

	2006			2005

	(in thousands, except per share data)
	Restated
Revenues:
Financial institution service fees	$	10,214		$	6,960
Retail inventory management services		2,095			2,202
Other products and services		722			37

Total revenues		13,031			9,199

Cost of Revenues:
Financial institution service fees		2,008			544
Retail inventory management services		247			287

Gross profit		10,776			8,368
Operating Expenses:
General and administrative		4,782			3,165
Selling and marketing		4,929			4,364
Research and development		131			65
Amortization		463			81
Other operating (income) expense, net		109			—

Total operating expenses		10,414			7,675

Operating Income		362			693
Interest Expense, Net		655			70

Income (loss) Before Income Taxes		(293	)		623
Income tax provision (benefit)		(112	)		244

Net Income (loss)		(181	)		379
Preferred stock dividends		552			540

Net Loss Available to Common Shareholders	$	(733	)	$	(161	)

Loss Per Share:
Basic	$	(0.23	)	$	(0.06	)

Diluted	$	(0.23	)	$	(0.06	)

Weighted Average Common Shares Outstanding:
Basic		3,145			2,915

Diluted		3,145			2,915

The accompanying notes are an integral part of these consolidated financial statements.

F-2

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
For the Three Months Ended March 31, 2006 and 2005

	2006			2005

	(in thousands)
	Restated
Cash Flows From Operating Activities:
Net income (loss)	$	(181	)	$	379
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Write-off of debt issuance costs		112			—
Depreciation and amortization		943			525
Depreciation on fixed assets under operating leases		23			—
Deferred taxes		(76	)		202
Amortization of debt issuance costs and discount		164			24
Stock option compensation expense		160			6
Deferred gain on land sale		(4	)		(4	)
Loss on write-down or disposal of fixed assets and software development costs		32			—
Amortization of lease income and initial direct costs		(168	)		—
Gain on sale of leased equipment		(28	)		—
Gain on sale of other assets		(40	)		—
Changes in assets and liabilities:
Accounts receivable		(107	)		(15	)
Prepaid and other current assets		260			140
Accounts payable		581			(440	)
Accrued liabilities		(181	)		(309	)
Deferred revenue		570			(100	)
Other non-current liabilities		6			—

Net cash provided by operating activities		2,066			408

Cash 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		(29	)		—
Lease receivables paid		993			—
Proceeds from lease terminations		27			—
Proceeds received from sale of other assets		62			—
Additions to property and equipment		(170	)		(66	)
Additions to intangibles and other assets		(10	)		—
Software development costs		(496	)		(153	)
Payments received on notes receivable		14			—

Net cash used in investing activities		(16,973	)		(219	)

The accompanying notes are an integral part of these consolidated financial statements.

F-3

GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
For the Three Months Ended March 31, 2006 and 2005

	2006			2005

	(in thousands)
	Restated
Cash Flows From Financing Activities:
Repayments on long-term debt	$	(250	)	$	(416	)
Repayments on capital lease obligations		(42	)		—
Proceeds from amended and restated debt facility with Bank of America, net of issuance cost of $425		15,575			—
Proceeds from revolving line of credit, net		1,493			400
Repayments of non-recourse lease financing notes payable		(658	)		—
Proceeds from non-recourse lease financing notes payable		6			—
Proceeds from exercise of employee stock options		2			358
Stock issued through employee stock purchase plan		4			9
Payments of preferred dividends declared		—			(540	)

Net cash provided by (used in) financing activities		16,130			(189	)

Net Change in Cash and Cash Equivalents		1,223			—
Cash and Cash Equivalents at beginning of year		137			7

Cash and Cash Equivalents at end of period	$	1,360		$	7

Supplemental Cash Flow Information:
Cash payments for income taxes during period	$	58		$	119

Cash payments of interest during period	$	267		$	45

Noncash Investing Activities:
Issuance of 62,954 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		$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-4

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

A.	The Company

Goldleaf Financial Solutions, Inc. (“we” or the “Company”) was formerly known as Private Business, Inc. until its name changed effective May 4, 2006. The Company is a provider of a suite of technology-based products and services that help community financial institutions serve their customers, improve their operational efficiencies, enhance their competitive position, increase their profitability and help them satisfy regulatory requirements. We provide our solutions primarily on an outsourced basis, which enables our clients to obtain advanced products without having to incur substantial capital expense and hire the skilled personnel required to develop, implement and update their internal systems. In addition to the suite of solutions we offer to community financial institutions, we also offer products and services to small businesses.

B.	Restatement of Historical Financial Statements

The Company has restated its previously issued financial statements to correct for an error related to audit fees incurred for historical audits of acquired companies.

The Company was required to complete audits of certain historical periods of both KVI Capital and Goldleaf Technologies following its acquisitions of these entities. The audits were performed in the quarters ended March 31, 2006, June 30, 2006, and September 30, 2006. The Company capitalized these audit fees as direct acquisition costs of the entities. However, during the Company’s year-end audit, it was determined that these audit costs should be expensed as incurred rather than capitalized as part of the direct costs of the acquisitions. Therefore, the Company has restated its consolidated financial statements for the three months ended March 31, 2006 to properly reflect these audit costs as a period expense. The adjustment lowers the Company’s operating income by $55,000, increases the Company’s net loss available to common shareholders by $34,000, and increases our diluted loss per share by $0.01 for the three months ended March 31, 2006.

The Company also restated its previously issued financial statements for the three and six months ended June 30, 2006 and the three and nine months ended September 30, 2006.

The following table shows the effect of the restatement on the consolidated financial statements of the Company for the three months ended March 31, 2006:

	March 31, 2006

	As Reported			As Restated

	(in thousands)
Balance Sheet changes:
Prepaid and other current assets	$	1,732		$	1,753
Total current assets		21,122			21,143
Accrued liabilities		2,585			2,640
Total current liabilities		31,823			31,878
Retained earnings	$	2,833		$	2,799

	Three Months Ended March 31, 2006

Statement of Operations changes:
General and administrative	$	4,727		$	4,782
Total operating expenses		10,359			10,414
Operating income		417			362
Loss before income taxes		(238	)		(293	)
Income tax benefit		(91	)		(112	)
Net loss		(147	)		(181	)
Net loss available to common shareholders		(699	)		(733	)
Diluted loss per share	$	(0.20	)	$	(0.23	)

C.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X.

F-5

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position, and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

These consolidated financial statements, footnote disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

Principles of Consolidation

The accompanying financial statements include the accounts of Goldleaf Financial Solutions, Inc. and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Our significant accounting policies include revenue recognition, software development costs, income taxes and acquisition accounting and accounting for long-lived assets, intangibles assets and goodwill. Please refer to our critical accounting policies as described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2005 for a more detailed description of these accounting policies.

Comprehensive Income

The Company applies the provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that the changes in the amounts of certain items, including gains and losses on certain securities, be shown in the financial statements as a component of comprehensive income. As of March 31, 2006, there was no difference between total comprehensive income and net loss.

Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment, which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R requires the cost of employee services received in exchange for equity instruments awarded or liabilities incurred to be recognized in the financial statements. Under this method, compensation cost in the first quarter of 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated using the Black-Scholes option pricing.

The Company has four stock option plans; the 1994 Stock Option Plan, the 1999 Stock Option Plan, the 2004 Equity Incentive Plan, and the 2005 Long-Term Equity Incentive Plan. Options under these plans include non-qualified and incentive stock options and are issued to officers, key employees and directors of the Company. The Company has reserved 1,640,709 new shares of common stock for these plans, under which the options are typically granted at a minimum of 100% of the fair market value of common stock on the date of the grant, expire 10 years from the date of the grant and typically vest over a four-year service period as determined by the board of directors. Certain options provide for accelerated vesting if there is a change in control (as defined by the plans). The Company also has approximately 169,697 shares of common stock reserved for the issuance of options replacing the Towne options outstanding at the time of the Towne merger.

Under the Black-Scholes option-pricing model, the Company estimated volatility using its historical share price performance over the expected life of the option. Results of prior periods do not reflect any restated amounts, and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises or grants of restricted shares. The Company has determined that it has two pools of employees for the purpose of calculating the estimated compensation cost: executive officers pool and non-executive officers’ pool. These two pools properly segregate our employees that have similar historical exercise and forfeiture behavior.

F-6

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

The adoption of SFAS No. 123R decreased the Company’s first quarter 2006 reported operating income and increased the loss before income taxes by approximately $160,000, increased the reported net loss by approximately $98,000 and increased the reported basic and diluted net loss per share by $0.05 per share. The expense, before income tax effect, is reflected proportionately in the general and administrative expense, selling and marketing expense, and research and development expense. The Company’s adoption of SFAS No. 123R did not affect operating income, income before income taxes, net income, cash flow from operations, cash flow from financing activities, and basic and diluted net income per share in the comparable first quarter of 2005.

The fair value of each option award is estimated, on the date of grant using the Black-Scholes option pricing model, which incorporates ranges of assumptions for inputs as shown in the following table.

	•	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.

	Quarter Ended March 31,

	2006			2005

Dividend yield range		0.0	%		0.0	%
Expected volatility		58	%		75	%
Risk-free interest rate range		4.5	%		4.0	%
Expected term (in years)		6.2 years			8 years

As of March 31, 2006, there was $2.6 million of total unrecognized compensation cost related to unvested share-based compensation arrangements. We expect to recognize this cost over a weighted-average period of 3.6 years.

Below is a summary of the Company’s option activity as of March 31, 2006, and changes during the quarter then ended:

	Number of Shares			Weighted Average Exercise Price		Remaining Contractual Life		Intrinsic Value

Balance of December 31, 2005		1,072,659		$	11.20
Granted		355,460			6.65
Exercised		(560	)		2.95
Canceled		(18,935	)		10.85

Balance of March 31, 2006		1,408,624		$	9.70		8.4 years	$	2,389,427

Balance exercisable at March 31, 2006		337,966		$	18.90		7.4 years	$	443,455

The weighted-average grant date fair value of options granted during the quarter ended March 31, 2006 and 2005 was $3.95 and $8.25, respectively. The total fair value of stock options that vested during the three months ended March 31, 2006 was $84,956. The total intrinsic value of stock options exercised during the three months ended March 31, 2006 was $3,162.

During the first quarter of 2006, cash received from options exercised was $1,652, and the actual tax benefit realized for the tax deductions from stock options exercised totaled $0.

Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and did not utilize the fair value method.

F-7

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

The following table illustrates the effect on net loss available to common shareholders and earnings loss per share if the fair value based method had been applied to all outstanding and unvested awards for the three-month period ended March 31, 2005.

	Three Months Ended March 31, 2005

	(In thousands, except per share data)
Net loss available to common shareholders, as reported	$	(161	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		4
Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		15

Pro forma net loss	$	(142	)

Loss per share:
Basic — as reported	$	(0.06	)

Basic — pro forma	$	(0.05	)

Diluted — as reported	$	(0.06	)

Diluted — pro forma	$	(0.05	)

D.	Reclassifications

Historically, we have reported our results of operations using the following revenue line items; participation fees; software license; retail inventory management services; insurance brokerage fees; and maintenance and other. Due to our recent acquisitions, we believe that the presentation using revenue line items for financial institution service fees, retail inventory management services and other products and services, will be more useful to an understanding of our operations. Also, we have added a cost of revenues category to capture direct cost associated with the generation of our revenues. Therefore, we intend to present our consolidated statement of operations in this manner on an ongoing basis beginning with the consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q. Revenues for the three-month period ended March 31, 2005 have been reclassified to reflect this presentation.

Certain prior year amounts have been reclassified to conform with current year presentation.

F-8

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

E.	Acquisitions

Assets of P.T.C. Banking Systems, Inc.

On January 18, 2006, the Company executed an asset purchase agreement to acquire certain operating assets and liabilities from P.T.C. Banking Systems, Inc. (“P.T.C.”), in exchange for cash consideration of $948,836 and common stock consideration of $61,000 (8,485 shares valued at $7.30). Simultaneous with the execution of the asset purchase agreement, the Company entered into a one-year employment agreement with the principal officer of P.T.C. The operating results of P.T.C. were included with those of the Company beginning January 18, 2006. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The preliminary purchase price allocation is as follows:

(In thousands, except per share amounts)

Purchase Price:
Cash	$	949
Common shares (8,485 shares valued at $7.30 per share)		61
Direct costs of acquisition		19

Total purchase price	$	1,029

Value assigned to assets and liabilities:
Assets:
Current assets		10
Property and equipment		38
Customer list (estimated life of ten years)		150
Acquired technology (estimated life of five years)		500
Trademarks/tradenames (indefinite life)		50
Non-compete (estimated life of three years)		75
Goodwill/unidentified intangibles		476
Liabilities:
Accounts payable		10
Accrued liabilities		10
Deferred revenue		250

Total net assets	$	1,029

The Company is continuing to evaluate and value any identifiable intangible assets of P.T.C. and expects to complete this analysis by June 30, 2006. The above preliminary purchase price allocation may be adjusted based on the results of this analysis.

F-9

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

Goldleaf Technologies, Inc.

On January 31, 2006, the Company acquired 100% of the outstanding capital stock of Goldleaf Technologies, Inc. (“GTI”) in exchange for cash consideration of $16,785,121 and common stock consideration of $400,341 (54,468 shares valued at $7.35 per share). Simultaneous of the execution of the merger agreement, the Company entered into a two-year employment agreement with the chief executive officer of GTI to become an executive vice president of the Company. The operating results of GTI were included with those of the Company beginning January 31, 2006. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The preliminary purchase price allocation is as follows:

(In thousands except share amounts)

Purchase Price:
Cash (includes $830,000 paid to executives considered as purchase price)	$	17,615
Note payable to executive		1,000
Common shares (54,468 shares valued at $7.35 per share)		400
Direct acquisition costs		186

Total purchase price	$	19,201

Value assigned to assets and liabilities:
Assets:
Cash	$	1,405
Restricted cash		11,258
Accounts receivable		560
Other current assets		156
Property and equipment		1,811
Deferred tax asset		1,250
Customer list (estimated life of ten years)		5,000
Acquired technology (estimated life of seven years)		2,000
Trademarks/tradenames (indefinite life)		1,000
Product patents (estimated life of twenty years)		2,000
Non-compete (estimated life of three years)		500
Goodwill/unidentified intangibles		11,772
Liabilities:
Accounts payable		738
Accrued liabilities		1,638
Customer deposits		11,258
Capital lease obligations		1,557
Deferred revenue		4,320

Total net assets	$	19,201

The Company is continuing to evaluate and value any identifiable intangible assets of GTI and expects to complete this analysis by June 30, 2006. The above preliminary purchase price allocation may be adjusted based on the results of this analysis.

The acquisition of GTI brings an additional three primary products from which its revenues are generated; ACH Manager and Client, remote deposit and website design and hosting. Below are the current revenue recognition policies for these products.

F-10

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

ACH Manager and Client (“ACH”) and Remote Deposit Revenue

The ACH and Remote Deposit products are accounted for in accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. These products are licensed under automatically renewing agreements, which allow the licensees use of the software for the term of the agreement (typically five years) and each renewal period. Typically, there is an up-front fee, an annual or monthly maintenance fee for each year of the contract, and per transaction fees for processing of ACH and remote deposit transactions. The Company also offers training services on a per training day basis if the customer requests training. The Company has not established sufficient evidence of stand-alone value of the distinct elements of the arrangement and therefore has deferred the up-front fees and is amortizing the fees to revenue over the estimated life of the customer relationship, which was estimated at six years for the ACH revenue stream and five years for the remote deposit revenue stream, for the periods presented in the accompanying financial statements. The annual maintenance fee covers phone support and all unspecified software enhancements and upgrades. Annual maintenance fees are deferred and recognized into income over the one-year life of the maintenance agreement. Monthly maintenance fees are recognized on a monthly basis as earned. The transaction fees are recognized monthly as the transactions occur. Training is recognized when delivered based on the fair value of the training services when delivered separately.

Website Design and Hosting

The Company offers financial institution website design services as well as hosting services for the website once design is complete. The Company charges an up-front fee for the design services and charges a monthly website hosting fee each month of the contract, which is typically five years. Typically included in the monthly hosting fee is a limited amount of website maintenance hours each month. Any maintenance work exceeding the designated number of hours included in the monthly hosting fee is billed at an agreed upon hourly rate as the services are rendered. The Company accounts for the website design and hosting services in accordance with EITF No. 00-21. The Company has not established objective and reliable evidence of fair value of the undelivered elements (the hosting and maintenance services) and therefore has deferred the up-front design fees and amortizes the fees to revenue over the estimated life of the customer, which was estimated at five years for the periods presented in the accompanying financial statements. Monthly hosting and maintenance revenues are recognized on a monthly basis as earned.

Debt

On January 23, 2006, the Bank of America Credit Agreement was amended and restated in its entirety (“Amended and Restated Credit Facility”). The Amended and Restated Credit Facility is for an original principal amount of $18.0 million, consisting of a $10.0 million term loan due January 23, 2008, a $6.0 million term loan due July 23, 2006 and a $2.0 million revolving credit facility due January 23, 2008. The $10.0 million Term A Note has scheduled principal payments as follows:

March 31, and June 30, 2006	$	250,000/quarter
September 30 and December 31, 2006	$	500,000/quarter
Thereafter (until maturity)	$	750,000/quarter

Interest on the term notes and the revolving line of credit is due quarterly in arrears at LIBOR plus 3.0% or the lender base rate (as defined in the Amended and Restated Credit Facility) as selected by the Company.

The $6.0 million Term B Note is guaranteed by The Lightyear Fund, L.P. If we are unable to repay the $6.0 million Term B loan by July 23, 2006 and The Lightyear Fund, L.P. is required to repay the Term B loan on our behalf, we are obligated to issue new Series D preferred shares to The Lightyear Fund, L.P. The Series D preferred shares will carry a 10% per annum dividend rate, will have a mandatory redemption date nine months from the date of issuance, and will require the issuance of a warrant to purchase 13,209 shares of common stock with an exercise price of $0.05 per share. We will also be required to pay a closing fee equal to 3.75% of the amount The Lightyear Fund, L.P. repays to Bank of America on our behalf.

Simultaneous with the execution of the Amended and Restated Credit Facility, the Company and Lightyear PBI Holdings, LLC (“Lightyear”) exchanged a $10.0 million subordinated note that the Company had issued to Lightyear in December 2005 (the “Lightyear Note”) for 10,000 shares of the Company’s Series C Preferred Stock. The Series C shares have a stated redemption date of December 9, 2010 at $10.0 million and carry a 10% annual dividend rate through June 8, 2007 and thereafter increasing to 12% annually. In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, the Series C preferred shares are included in the liability section of our consolidated balance sheet, and dividends on the Series C Preferred Stock are charged to interest expense as accrued. Further, the originally recorded debt discount did not change as a result of the exchange, and it will continue to be accrued to interest expense until the stated redemption date. In connection with the exchange of the Lightyear Note for Series C Preferred Stock, the warrants that were issued in December 2005 in connection with the Lightyear Note were amended such that the exercise price of such warrants can now be paid, at the option of their holder: (i) in cash or by wire transfer, (ii) by the surrender of shares that would otherwise be issuable upon exercise of the warrant that have a market price equal to the aggregate exercise price, or (iii) through a redemption of shares of the Company’s Series C Preferred Stock having a liquidation value equal to the aggregate exercise price. Under the terms of the amended warrant agreement and amended warrants, in the event that the Company redeems any shares of Series C Preferred Stock on or before June 23, 2007, the number of shares issuable pursuant to the warrants will be reduced in accordance with a formula set forth in the warrant agreement.

F-11

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

As a result of entering into the Amended and Restated Credit Facility with Bank of America, the Company recorded a one-time charge of $112,296 to write off the remaining unamortized debt issuance costs from the prior debt facility.

On April 5, 2006, the Company further amended the Amended and Restated Credit Facility to allow for two additional unsecured term loans. Term Loan C and Term Loan D were executed on April 5, 2006 for $1.0 million and $750,000, respectively. Both loans mature on September 30, 2006 and carry the same interest rates as the other term loans described above.

The Bank of America Credit Facility is secured by a pledge of all Company assets, imposes financial covenants, and requirements and contains limitations on the Company’s ability to sell material assets, redeem capital stock and pay dividends, among other actions. As of March 31, 2006, the Company was in compliance with all such covenants as amended on May 8, 2006. The facility had an interest rate of approximately 7.5% during the first quarter of 2006. Total interest expense for this facility for the first quarter of 2006 was approximately $219,000.

In conjunction with the acquisition of GTI discussed in Note D, the Company issued two notes payable to Paul McCulloch, the President of GTI, as a portion of the consideration paid to him for executing an employment agreement with the Company. The notes are for $850,000 (due June 15, 2006) and $150,000 (due April 30, 2007), are unsecured and carry interest at prime rate as published in The Wall Street Journal (7.5% at March 31, 2006).

G.	Net Income Per Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period, which includes the additional dilution related to exercise of stock options and warrants as computed under the treasury stock method and the conversion of the preferred stock under the if-converted method.

The following table represents information necessary to calculate earnings per share for the three-month period ended March 31, 2006 and 2005:

	Three Months Ended March 31,

	2006			2005

	(In thousands)
Net loss available to common shareholders	$	(733	)	$	(161	)

Weighted average common shares outstanding		3,145			2,915
Plus additional shares from common stock equivalent shares:
Options and convertible preferred stock		0			0

Diluted weighted average common shares outstanding		3,145			2,915

For the three months ended March 31, 2006 and 2005, approximately 5.3 million and 3.6 million employee stock options, warrants and the Series B preferred shares were excluded from diluted earnings per share calculations, as their effects were anti-dilutive.

H.	Legal Proceedings

We are not currently a party to, and none of our material properties is currently subject to, any material litigation other than routine litigation incidental to our business.

I.	Segment Information

The Company accounts for segment reporting under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Corporate overhead costs and interest have not been allocated to income before taxes of the retail inventory forecasting segment. Additionally, $1.5 million of goodwill associated with the Company’s August 2001 merger with Towne Services, Inc. has been allocated to the retail inventory forecasting segment and is therefore included in the segment’s total assets.

F-12

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

The following tables summarize the financial information concerning the Company’s reportable segments as of and for the three months ended March 31, 2006 and 2005.

	Three Months Ended March 31, 2006								Three Months Ended March 31, 2005

	Financial Institution Service Fees			Retail Inventory Management Services		Total			Financial Institution Service Fees		Retail Inventory Management Services		Total

	(In thousands)
Revenues	$	10,928		$	2,103	$	13,031		$	6,997	$	2,202	$	9,199

(Loss) income before taxes		(693	)		400		(293	)		346		277		623

Assets		71,011			3,634		74,645			16,646		4,012		20,658

Total expenditures for additions to long-lived assets	$	664		$	12	$	676		$	219	$	0	$	219

J.	Stock Option Grants

In conjunction with the acquisition of GTI discussed in Note D above, the Company granted 355,460 common stock options at an exercise price of $6.65 per share. These options were issued under the Company’s 2005 Long-Term Incentive Plan and vest one-fourth each year. The Company has calculated the estimated fair value of these options in accordance with SFAS 123R using a volatility rate of 58%, an expected dividend yield of 0.0%, a risk-free rate of return of 4.5% and an expected life of 6.2 years. The estimated fair value of these options, using the above assumptions, is $3.95 per share.

K.	Supplemental Unaudited Pro Forma Financial Data

As described in Note D, the Company acquired GTI in the first quarter of 2006. Furthermore, the Company acquired KVI Capital, Inc. (KVI Capital) and Captiva Solutions, LLC (Captiva) in the third and fourth quarters of 2005, respectively. Below is unaudited pro forma consolidated statement of operations data of the Company as if these businesses were acquired as of January 1, 2006 (GTI) and January 1, 2005 (GTI, KVI Capital, and Captiva), respectively.

	Unaudited Pro Forma Statement of Operations For The Three Months Ended March 31, 2006

							Unaudited Pro Forma Adjustments

	Goldleaf			GTI			Debit				Credit		Total

	(In thousands, except per share data)
Revenues	$	13,031		$	1,014	A	$	41					$	14,004
						B		88
Operating expenses		12,669			1,010	C		6						13,773

Operating income (loss)		362			4			(135	)					231
Interest expense, net		655			0	D		87						742

Income (loss) before provision (benefit) for income taxes		(293	)		4			(222	)					(511	)

Income tax benefit		(112	)		0			0		E		87		(199	)

Net loss		(181	)		4			(222	)			87		(312	)
Preferred dividends		552			0			0				0		552

Net loss available to common shareholders	$	(733	)	$	4			(222	)	E		87	$	(864	)

Diluted earnings (loss) per share	$	(0.23	)										$	(0.27	)

F-13

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

	Unaudited Pro Forma Statement of Operations For The Year Ended December 31, 2005

	Goldleaf		Captiva			KVI Capital			GTI				Unaudited Pro Forma Adjustments						Pro Forma

													Debit				Credit

	(In thousands, except per share data)
Revenues	$	38,351	$	1,713		$	757		$	9,412		A	$	917			$		$	49,316
Operating expenses		34,276		2,289			935			10,721		B		1,124

												C		468						49,813

Operating income (loss)		4,075		(576	)		(178	)		(1,309	)			(2,509	)					(497	)
Interest expense, net		381		164			91			(39	)	D		2,369						2,966

Total other expenses		381		164			91			(39	)	D		2,369						2,966

Income (loss) before provision for income taxes		3,694		(740	)	��	(269	)		(1,270	)			(4,878	)					(3,463	)
Provision (benefit) for income taxes		1,359														E		2,710		(1,351	)

Net income (loss)		2,335		(740	)		(269	)		(1,270	)			(4,878	)			2,710		(2,112	)
Preferred stock dividends		2,160								2,915						F		2,915		2,160

Net income (loss) attributable to common shareholders		175		(740	)		(269	)		(4,185	)			(4,878	)			5,625		(4,272	)

Diluted earnings (loss) per share	$	0.05																	$	(1.40	)

The 2006 Goldleaf column above includes the results of GTI from its date of acquisition of January 31, 2006. The 2005 Goldleaf columns above includes the results of KVI Capital and Captiva from their dates of acquisition of August 1 and December 9, 2005, respectively.

Pro forma adjustments:

	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, 2006 and January 1, 2005, respectively, and recorded the deferred service obligation at its estimated fair value as of that date.

	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 $10.5 million of identified intangibles, consisting of acquired technology ($2.0 million), customer lists ($5.0 million), non-compete agreements ($500,000), tradenames and trademarks ($1.0 million) and product patents ($2.0 million), and that the Company amortizes these amounts over estimated useful lives of seven, ten, three, indefinite and twenty years, respectively. For 2005, the pro forma amounts assume that the Company recorded approximately $13.7 million of identified intangibles, consisting of acquired technology ($2.8 million), customer lists ($6.6 million), vendor program ($0.1 million), non-compete agreements ($1.2 million), tradenames and trademarks ($1.0 million) and product patents ($2.0 million), and that the Company amortizes these amounts over estimated average useful lives of five, ten, seven, three, indefinite, and twenty 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.

F-14

GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

The pro forma statement of operations data for the year ended December 31, 2005 do not include stock compensation expense for the new stock options issued in conjunction with the Captiva and GTI acquisitions. The stock option grants made on October 20, 2005 (related to Captiva) and January 31, 2006 (related to GTI) totaled approximately 920,000. Had these option grants been issued as of January 1, 2005, the estimated fair value using the Black-Scholes model would have been $7.05 and $8.05 per share, respectively. Until January 1, 2006, the Company accounted for stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and did not utilize the fair value method. If the Company expensed options under SFAS No. 123, Accounting for Stock-Based Compensation, during 2005 and if the Company had acquired Captiva and GTI on January 1, 2005, an estimated additional $1.3 million of compensation expense would have been expensed during the year ended December 31, 2005. Beginning January 1, 2006, the Company began to expense the remaining unvested fair value of all stock options, including those issued as part of the GTI and Captiva transactions. The estimated annual stock compensation expense for the stock options issued as part of these acquisitions, using the actual calculated fair values of $3.70 and $4.15, respectively, is approximately $464,000.

Captiva organized and began operations on April 1, 2005. On June 1, 2005, Captiva acquired all the operating assets of Total Bank Technology, LLC (“TBT”). The year ended December 31, 2005 consists of the full five months’ results of TBT (January 1 — May 31, 2005 presented separately) prior to the acquisition by Captiva along with the results of Captiva from April 1, 2005 through December 31, 2005, including the results of TBT for the months of June through December 2005. Had Captiva been in existence as of January 1, 2005, the 2005 results would have reflected additional expenses for the management team and facilities expense of Captiva.

The pro forma financial data are presented for informational purposes. You should not rely on the pro forma amounts as being indicative of the financial position or the results of operations of the consolidated companies that would have actually occurred had the acquisitions been effective during the periods presented or of the future financial position or future results of operations of the consolidated companies. You should read this information in conjunction with the accompanying notes thereto and with the historical consolidated financial statements and accompanying notes of the company included elsewhere in this document.

L.	Related Party Transaction

M.	Subsequent Events

On April 5, 2006, the Company entered into an amendment to its existing credit facility with Bank of America. The amendment increased the total facility from $18.0 million to $19.75 million through the issuance of two additional term notes. Term Note C is for a total of $1.0 million and term Note D is for a total of $750,000. Both of these notes are unsecured and mature on September 30, 2006. Interest is payable quarterly at the Company’s option of LIBOR plus 3.0% or the lender’s base rate.

Under the terms of the Bank of America credit facility, we are prohibited from declaring and paying cash dividends on our preferred stock during the term of the facility. On January 23, 2006, Lightyear agreed to accept PIK (paid in kind) dividends consisting of preferred stock and warrants, in lieu of cash dividends on (a) the Series A preferred stock through January 1, 2007 and (b) the Series C preferred stock through January 1, 2008. Accordingly, on April 1, 2006, we issued:

	•	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 153,409 shares of our common stock at an exercise price of $6.60 per share.

On August 8, 2006, the Company’s Board of Directors approved a one for five reverse stock split which was effected on September 8, 2006. As a result, all common shares, options, warrants and per share amounts for all prior periods have been adjusted to reflect this reverse split in the accompanying consolidated historical financial statements.

F-15

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2006 and 2005

Note Regarding Forward Looking Information

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future economic performance, plans and objectives of management for future operations and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The words “expect,” “estimate,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. We make forward-looking statements in Items 2 and 3 of Part I and in Item 1A of Part II of this report. Some of the forward-looking statements relate to our intent, belief or expectations regarding our strategies and plans for operations and growth. Other forward-looking statements relate to trends affecting our financial condition and results of operations and our anticipated capital needs and expenditures. These statements involve risks, uncertainties and assumptions, including industry and economic conditions, competition and other factors discussed in this and our other filings with the SEC. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those that are anticipated in the forward-looking statements. Other forward-looking statements relate to trends affecting our financial condition and results of operations and our anticipated capital needs and expenditures. See Part II, Item 1A, “Risk Factors” below, for a description of some of the important factors that may affect actual outcomes.

For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf is expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We provide a suite of technology-based products and services that help community financial institutions compete more effectively with larger regional and national financial institutions. We believe that community financial institutions, which have traditionally competed on personalized service, are facing increasing challenges to improve their operating efficiencies and grow their customer base. These challenges include:

	•	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.

We believe that these competitive pressures are particularly acute for community financial institutions, which lack the substantial capital and specialized personnel to address their technology needs internally. Our solutions enable our clients to focus on their core competencies while we help them meet their product and technology needs. We provide our solutions primarily on an outsourced basis.

The financial technology industry is currently characterized by significant acquisition activity, the introduction of new product and service offerings for financial institutions and an increased emphasis on security of customer data. We believe that these trends will result in greater opportunities for providers of financial technology.

Historically, we have generated our revenues primarily from participation fees, software licenses fees, maintenance fees and insurance brokerage fees derived from BusinessManager, our accounts receivable financing solution, and from fees associated with our retail inventory management services product. For the quarter ended March 31, 2006, we derived approximately 53.0% of our consolidated revenues from BusinessManager and approximately 16.1% of our consolidated revenues from retail inventory management services. We expect to continue to generate a substantial portion of our revenues from these sources during the remainder of 2006 and for some period thereafter. In recent years, our revenues from BusinessManager and retail inventory management services have declined from year-to-year, and this trend may continue. Partly as a result of the performance of our BusinessManager and retail inventory management services businesses, in December 2005 we broadened our focus to providing a suite of solutions primarily to community financial institutions. We accomplished this shift in strategy by acquiring:

	•	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.

We paid approximately $29.0 million for these acquisitions and our earlier acquisition of KVI Capital in July 2005, and we recorded goodwill totaling approximately $17.5 million.

In addition to these acquisitions, we further implemented our strategy by adding several new members to our management team who have significant industry experience, including Lynn Boggs, our new chief executive officer. We now offer products and services to over 2,500 community financial institutions, which gives us an opportunity to cross-sell our full range of products and services across our client base.

Revenues

We generate revenue from three main sources:

	•	financial institution service fees;

	•	retail inventory management services; and

	•	other products and services.

Financial Institution Service Fees

Financial institution service fees include:

	•	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. We derive revenue from two types of participation fees. First, we earn a fee during the first 30 days after a client financial institution implements our solution and purchases accounts receivable from its small business customers. Second, we earn an ongoing participation fee from subsequent purchases of accounts receivable by the client. Both types of fees are based on a percentage of the accounts receivable that the client purchases during each month, with the second type of fee being a smaller percentage of the accounts receivable purchased.

Insurance brokerage fees are derived from the sale of credit and fraud insurance products issued by a third-party national insurance company. We earn fees based on a percentage of the premium paid to the insurance company. We recognize these commission revenues when our financial institution clients purchase the accounts receivable covered by credit and fraud insurance policies.

Core Data Processing and Image Processing Fees. We generate support and service fees from implementation services, from ongoing support services to assist the client in operating the systems and to enhance and update the software and from providing outsourced core data processing services. We derive revenues from outsourced item and core data processing services from monthly usage fees, typically under multi-year contracts with our clients.

Software License and Maintenance Fees. We derive software license fees from the sale of software associated with our accounts receivable financing solutions and our core data processing solution. Software license fees for our accounts receivable financing solutions consist of two components: a license fee and a client training and support fee. We receive these one-time fees on the initial licensing of our program to a client financial institution. Our license agreements have terms ranging from three to five years and are renewable for subsequent terms. We generate annual software maintenance fees from our client financial institutions starting on the first anniversary of the BusinessManager license agreement and annually thereafter. We license our core data processing product under standard license agreements that typically provide the client with a non-exclusive, non-transferable right to use the software. We generate annual software maintenance fees from our client financial institutions starting on the first anniversary of the core data processing license agreement and annually thereafter.

ACH Origination and Processing, Remote Capture and Deposit Processing Fees. We license these products via up-front fees to financial institutions at the time of execution of the agreements, which are typically five-year contracts. We defer these up-front fees and recognize them ratably over the estimated lives of the customer relationship. We also generate monthly fees from each originator of ACH transactions, and we receive fees for each ACH transaction that occurs each month. We offer annual maintenance support to all of our financial institution clients for a fee that is generally equal to 20% of the up-front fees.

Leasing Revenues. Subsequent to our acquisition of KVI Capital in August 2005, we began to offer equipment leasing services to some of our clients. We have no credit risk exposure for these leases. Our leases fall into two categories: direct financing leases and operating leases. For direct financing leases, the investment in direct financing leases caption consists of the sum of the minimum lease payments due during the remaining term of the lease and unguaranteed residual value of the leased asset. We record the difference between this sum and the cost of the leased asset as unearned income. We amortize unearned income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease. For leases classified as operating leases, we record the leased asset at cost and depreciate the leased asset. We record lease payments as rent income during the period earned.

Financial Institution Website Design and Hosting Fees. We offer website design and hosting services to financial institutions, although we do not host any confidential bank data on our servers. The revenues we generate for these services consist of up-front fees associated with the design and implementation of each website and monthly hosting fees for hosting each website in our data center.

Retail Inventory Management Services

We generate retail inventory management services revenue from fees we charge primarily for providing inventory merchandising and forecasting information for specialty retail stores and ancillary services related to these products. We use proprietary software to process sales and inventory transactions and provide the merchandising forecasting information.

Other Products and Services

We generate revenues from charges for our Free Checking direct mail program, sales of standard business forms used in our BusinessManager program and statement rendering and mailing.

Historically, we have derived substantially all of our revenues from fees associated with our accounts receivable financing solutions and retail inventory management services. While we believe that our recent acquisitions and product diversification will enable us to derive revenues from a broader mix of products and services, we anticipate that revenues derived from our accounts receivable solutions and inventory management services will continue to account for a substantial portion of our revenues in 2006 and for a period thereafter.

Results of Operations

The following table provides, for the periods indicated, the percentage relationship of the identified consolidated statement of operations items to total revenues.

	Three Months Ended March 31,

	2005			2006

Revenues:
Financial institution service fees		75.7	%		78.4	%
Retail inventory management services		23.9			16.1
Other products and services		0.4			5.5

Total revenues		100.0			100.0
Cost of revenues:
Financial institution service fees		5.9			15.4
Retail inventory management services		3.1			1.9

Gross profit		91.0			82.7
Operating expenses:
General and administrative		34.4			36.7
Selling and marketing		47.5			37.8
Research and development		0.7			1.0
Amortization		0.9			3.6
Other operating (income) expense, net		0.0			0.8

Total operating expenses		83.5			79.9

Operating income		7.5			2.8
Interest expense, net		(0.8	)		(5.0	)
Other income		0.0			0.0

Income (loss) before income taxes		6.7			(2.2	)
Income tax provision (benefit)		2.7			(0.8	)

Net income (loss)		4.0	%		(1.4	)%

Historically, we have reported our results of operations using the following line items: participation fees; software license; retail inventory management services; insurance brokerage fees; and maintenance and other. Due to our recent acquisitions, we believe that the presentation set forth above, using line items for financial institution service fees, retail inventory management services and other products and services, will be more useful to an understanding of our operations. Therefore, we intend to present our consolidated statement of operations as set forth above on an ongoing basis.

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Total revenues for the first quarter of 2006 increased 41.7% to $13.0 million compared to $9.2 million for the comparable period of 2005.

Financial Institution Service Fees. Financial institution service fees increased 46.8% to $10.2 million for the three months ended March 31, 2006 compared to $7.0 million for the three months ended March 31, 2005. The increase is primarily attributable to revenues generated by the entities we acquired during late 2005 and early 2006: KVI Capital, Captiva, P.T.C. and Goldleaf Technologies. Revenues from these acquired businesses totaled $2.8 million for the first quarter of 2006. The remaining increase relates to an increase in customer deconversion fees and increases in Free Checking and MedCash Manager revenues totaling approximately $288,000. As a percentage of total revenues, financial institution service fees accounted for 78.4% for the three months ended March 31, 2006 compared to 75.7% for the three months ended March 31, 2005.

Retail Inventory Management Services. Retail inventory management services revenues declined 4.9% to $2.1 million during the three months ended March 31, 2006 as compared to $2.2 million for the three months ended March 31, 2005. The decline is due to a reduction in point-of-sale support customers and a decline in billing services provided by RMSA to its customers. As a percentage of total revenues, retail inventory management services accounted for 16.1% for the first quarter of 2006 compared to 23.9% in the first quarter of 2005.

Other Products and Services. Revenues from other products and services increased substantially to $722,000 for the three months ended March 31, 2006 compared to $37,000 for the three months ended March 31, 2005. Other products and services include the sale of premium gifts associated with our Free Checking product, and equipment sales associated with our remote capture and ACH products. Approximately $685,000 of the increase is attributable to Free Checking gifts totaling $333,000 and remote capture equipment sales totaling $285,000. Revenues from other products and services accounted for 5.5% of total revenues for the three months ended March 31, 2006 compared to 0.4% for the three months ended March 31, 2005.

Cost of Revenues — financial institution service fees. Cost of revenues for financial institution services fees increased to $2.0 million for the three months ended March 31, 2006 compared to $544,000 for the three months ended March 31, 2005. This increase is primarily due to cost of sales of $164,000, $154,000 and $777,000 associated with KVI Capital, Captiva and Goldleaf Technologies, respectively. The remaining increase relates to increases in Free Checking expenses of $287,000 and MedCash expenses of $99,000. As sales of these products have increased in the first quarter of 2006, the costs associated with these products have also increased. There were minimal costs associated with these products during the first quarter of 2005. As a percentage of total revenues, cost of sales for financial institution service fees increased to 15.4% for the three months ended March 31, 2006 compared to 5.9% for the three months ended March 31, 2005.

Cost of Revenues — retail inventory management services. Cost of revenues related to retail inventory management services decreased 13.9% to $247,000 for the three months ended March 31, 2006 compared to $287,000 for the three months ended March 31, 2005. This decrease is due to a decline in salaries and benefits expense related to our point-of-sale customer support department. As a percentage of total revenues, cost of sales for retail inventory management services decreased to 1.9% for the three months ended March 31, 2006 compared to 3.1% for the three months ended March 31, 2005.

General and Administrative. General and administrative expenses increased 51.1% to $4.8 million for the three months ended March 31, 2006 compared to $3.2 million for the three months ended March 31, 2005. General and administrative expenses include the cost of our executive, finance, human resources, information and support services, administrative functions and general operations. The increase is primarily due to the additional general and administrative expenses of $526,000 and $642,000 associated with Goldleaf Technologies and Captiva, respectively. The majority of these expenses are salary and benefits for the non-sales employees of these entities. Also expensed in the first quarter of 2006 is approximately $160,000 of non-cash stock compensation expense as a result of our adoption of SFAS No. 123R, which requires the estimated fair value of employee stock options to be expensed over the service period. Additionally, $55,000 of audit fees related to the required acquisition audit of Goldleaf Technologies were expensed during the three months ended March 31, 2006. As a percentage of total revenue, general and administrative expenses increased to 36.7% for the three months ended March 31, 2006 compared to 34.4% for the three months ended March 31, 2005.

Selling and Marketing. Selling and marketing expenses increased 12.9% to $4.9 million for the three months ended March 31, 2006 compared to $4.4 million for the three months ended March 31, 2005. Selling and marketing expenses include cost of wages and commissions paid to our sales force, travel costs of the sales force, recruiting for new sales and marketing personnel and marketing fees associated with direct and telemarketing programs. Selling and marketing expenses also include the cost of processing fees paid to third parties related to the delivery of certain products and services. The increase was primarily due to the acquisition of Goldleaf Technologies, which contributed approximately $555,000 to this category. As a percentage of total revenue, selling and marketing expenses were 37.8% and 47.5% for the three months ended March 31, 2006 and March 31, 2005, respectively.

Research and Development. Research and development expenses increased to $131,000 for the three months ended March 31, 2006 compared to $65,000 for the three months ended March 31, 2005. Research and development expenses include the non-capitalizable direct costs associated with developing new versions of our software, as well as other software development projects that, in accordance with GAAP, we do not capitalize. The increase was primarily due to research and development activities for our remote capture and ACH products. These costs totaled approximately $90,000 during the three months ended March 31, 2006. As a percentage of total revenues, research and development expenses increased to 1.0% for the three months ended March 31, 2006 compared to 0.7% for the three months ended March 31, 2005.

Amortization. Amortization expense increased to $463,000 for the three months ended March 31, 2006 compared to $81,000 for the three months ended March 31, 2005. These expenses include the cost of amortizing intangible assets, including trademarks and software development costs, as well as identified intangibles recorded from our August 2001 merger with Towne Services and our acquisitions. The increase for the first three months of 2006 is due to the acquisitions of KVI Capital, Captiva, P.T.C. and Goldleaf Technologies during late 2005 and early 2006. The identifiable intangible assets recorded in these acquisitions resulted in an increase of approximately $381,000 in total amortization expense for the three months ended March 31, 2006.

Other Operating (Income) Expense, Net. Other operating (income) expense, net for the three months ended March 31, 2006 totaled $109,000. We had no other operating expenses for the three months ended March 31, 2005. For the three months ended March 31, 2006, other operating expenses included an approximate $112,000 charge related to the write-off of debt issuance costs associated with the debt facility before it was amended and restated in its entirety on January 23, 2006.

Operating Income. As a result of the above factors, our operating income decreased 47.8% to $362,000 for the three months ended March 31, 2006, compared to operating income of $693,000 for the three months ended March 31, 2005. As a percentage of total revenue, operating income was 3.2% for the three months ended March 31, 2005.

Interest Expense, Net. Interest expense, net increased to $655,000 for the three months ended March 31, 2006 compared to $70,000 for the three months ended March 31, 2005. The increase for the first three months of 2006 is primarily due to a large increase in our total debt outstanding for the first quarter of 2006 as compared to the first quarter of 2005. Our average debt outstanding in the first quarter of 2006 was approximately $28.0 million compared to approximately $3.4 million for the first quarter of 2005. Interest rates have also increased from 2005 to 2006. Included in interest expense during the first quarter of 2006 is the amortization of the debt discount associated with our Series C preferred stock. For the first quarter ended March 31, 2006 and 2005, interest expense includes approximately $89,000 and $24,000 of debt issuance cost amortization, respectively.

Income Tax Provision (Benefit). We had an income tax benefit of approximately $112,000 for the three months ended March 31, 2006 compared to a provision of $244,000 for the three months ended March 31, 2005. We expect our effective tax rate to be approximately 39% in all future periods. As a percentage of income before taxes, the income tax rate was approximately 39% for the first quarter of 2006.

Critical Accounting Policies

Management has based this discussion and analysis of financial condition and results of operations on our consolidated financial statements. The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its critical accounting policies and estimates on a periodic basis.

A “critical accounting policy” is one that is both important to the understanding of the company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 and other related generally accepted accounting principles. We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

Financial institution service fees. We earn two types of participation fees. Both types of fees are based on a percentage of the receivables that a client financial institution purchases from its small business customers during each month. Participation fees are recognized as earned, which is based upon the transaction dates of financial institution purchases from its small business customers.

We recognize insurance brokerage fee revenues when our financial institution clients purchase the accounts receivable covered by credit and fraud insurance policies and earn our fees based on a percentage of the premium paid to the insurance company.

We generate maintenance fees and other revenues from several ancillary products and services that we provide to our client financial institutions ratably over a 12-month period beginning on the first anniversary of the agreement with our client.

For customers that install our core data processing system at their location, we recognize revenues from the installation and training for the system as we provide the installation and training services. In addition, we charge an annual software maintenance fee, which we recognize ratably over the year to which it relates.

We recognize core data processing and image processing fees as we perform services for our clients. We also generate revenues from the licensing of our core data processing systems. We recognize revenue for licensing these systems in accordance with Statement of Position 97-2, “Software Revenue Recognition.” We recognize the software license after we have signed a non-cancelable license agreement, have installed the products and have fulfilled all significant obligations to the client under the agreement.

Our acquisition of Goldleaf Technologies added three primary products from which we earn revenues: ACH origination and processing; remote deposit; and website design and hosting. We describe the current revenue recognition policies for these products below.

We account for the ACH and remote deposit products in accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) No. 00-21, Revenue Arrangements with Multiple Deliverables. We license these products under automatically renewing agreements, which allow our customers to use the software for the term of the agreement, typically five years, and each renewal period. Typically, there is an up-front fee, an annual or monthly maintenance fee for each year of the contract, and per transaction fees for processing of ACH and remote deposit transactions. We also offer training services on a per training day basis if the customer requests training. Because we have not established sufficient evidence of stand-alone value of the distinct elements of the arrangement, for the periods presented in the accompanying financial statements we have deferred the up-front fees and are amortizing them to revenue over the estimated life of the customer relationship. We have estimated the lives of the customer relationship at six years for the ACH revenue stream and five years for the remote deposit revenue stream. The annual maintenance fee covers telephone support and all unspecified software enhancements and upgrades. We defer annual maintenance fees and recognize them into income over the one-year life of the maintenance agreement. We recognize monthly maintenance fees on a monthly basis as earned and recognize transaction fees monthly as the transactions occur. We recognize training revenue when we deliver the training, based on the fair value of the training services when delivered separately.

We offer financial institution website design services as well as hosting services for the website once design is complete. We charge an up-front fee for the design services and a monthly website hosting fee each month of the contract, which is typically five years. The monthly hosting fee typically includes a limited amount of website maintenance hours each month. We bill for any maintenance work exceeding the designated number of hours included in the monthly hosting fee at an agreed-to hourly rate as the services are rendered. We account for the website design and hosting services in accordance with EITF No. 00-21. Because we have not established objective and reliable evidence of fair value of the undelivered elements—the hosting and maintenance services—we have deferred the up-front design fees and amortize them to revenue over the estimated life of the customer relationship. We have estimated the lives of the customer relationship at five years for the periods presented in the accompanying financial statements. We recognize monthly hosting and maintenance revenues on a monthly basis as earned.

Software license fees for our accounts receivable financing solution consist of two components: a license fee and a client training and support fee. We receive these one-time fees on the initial licensing of our program to a client financial institution. Some agreements contain performance or deferred payment terms that must be met for us to receive payment and recognize revenue. We recognize revenues from the license fee once we have met the terms of the client agreement. We recognize the client training and support fee ratably over a four-month service period after activation of the license agreement.

Revenue recognition rules for up-front fees are complex and require interpretation and judgment on the part of management. Each of our products containing software elements, including core data processing, ACH processing, remote capture processing, accounts receivable financing and teller automation systems, requires the establishment of vendor specific objective evidence, or VSOE, for each element of the arrangement. Determining each element of an agreement and establishing VSOE can be complex. If we modify our contract terms to an extent that changes our VSOE conclusions, our revenue recognition practices could be materially affected. Management completed a thorough analysis of the new client licenses for accounts receivable financing we obtained in 2003 and 2004 and concluded that we completed all services related to the up-front fees in approximately four months. As a result, effective January 1, 2005, we changed the estimated service period for recognition of the up-front license fee from a twelve-month to a four-month revenue recognition period. This change in assumptions resulted in an increase of approximately $115,000 in financial institution service fees during the quarter ended March 31, 2005 and increased financial institution service fees by $130,000 for the year ended December 31, 2005. We believe that this practice most accurately portrays the economic reality of the transactions.

We recognize leasing revenues for both direct financing and operating leases. For direct financing leases, the investment in direct financing leases caption consists of the sum of the minimum lease payments due during the remaining term of the lease and unguaranteed residual value of the leased asset. We record the difference between the total above and the cost of the leased asset as unearned income. We amortize unearned income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease. There is a significant amount of judgment involved in estimated residual values of leased assets at the inception of each lease. Management bases these estimates primarily on historical experience; however, changes in the economy or product obsolescence could adversely affect the residual values actually obtainable. We monitor residual values quarterly to re-assess the recorded amounts. In the event our assumptions change regarding the amounts expected to be realized, we could incur substantial losses related to leased assets. For leases classified as operating leases, we record the leased asset at cost and depreciate the leased asset. We record lease payments as rent income during the period earned.

Retail Inventory Management Services

We recognize revenues for our retail inventory management services as the transactions occur and as we perform merchandising and forecasting services.

Other Products and Services

Revenues from other products and services consist of revenues from Free Checking, our direct mail program, and revenues from the sale of business forms. We record revenues from our Free Checking direct mail campaign as the customer of our client financial institution opens a checking account and receives a premium gift. We also receive a fee for each month that the checking account remains open through the third anniversary of the date that the customer opened the account. We recognize this revenue each month. We recognize revenues related to the business forms we sell in the period that we ship them to the client financial institution.

Software Development Costs

We expense software development costs incurred in the research and development of new software products and enhancements to existing software products as we incur those expenses until technological feasibility has been established. After that point, we capitalize any additional costs in accordance with Statement of Financial Accounting Standards SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. In addition, we capitalize the cost of internally used software when application development begins in accordance with AICPA SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which is generally the point when we have completed research and development, we have established project feasibility, and management has approved a development plan. Many of the costs capitalized for internally used software relate to upgrades or enhancements of existing systems. If the development costs will result in specific additional functionality of the existing system, we capitalize these costs at the point that application development begins. We amortize capitalized software development costs on a straight-line basis over their useful lives, generally three years. The key assumptions and estimates for this accounting policy relate to determining when we have achieved technological feasibility and whether the project being undertaken is one that will be marketable or enhance the marketability of an existing product for externally marketed software and whether the project will result in additional functionality for internal use software projects. Management consults monthly with all project managers to ensure that management understands the scope and expected results of each project to make a judgment on whether a particular project meets the requirements outlined in the authoritative accounting literature described above. There have been no significant changes in the critical assumptions affecting software development costs during any of the reporting periods presented in this quarterly report.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the asset and liability method, meaning that deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. We evaluate our ability to realize the deferred tax assets based on an assessment of the likelihood that we will have sufficient taxable income in future years to realize the recorded deferred tax assets. Deferred taxes for us primarily relate to NOLs, which require considerable judgment regarding whether we will ultimately realize them. For us, this judgment relies largely on whether we expect to have sufficient taxable income in future years that will allow for full use of the NOLs we record. The other key assumption affecting the amount of NOLs we record as a deferred tax asset is the estimated restriction in usage due to Section 382 of the Internal Revenue Code. Section 382 is very complex, requiring significant expertise and professional judgment to properly evaluate its effect on our usable NOLs. We use an independent public accounting firm to assist with this evaluation and believe that we have appropriately considered the limitations required by Section 382 in arriving at the deferred tax asset for NOLs. If our assumptions change, we could have significant increases in income tax expense and reductions in deferred tax assets and operating cash flows.

Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations

Our business combinations require us to estimate the fair value of the assets acquired and liabilities assumed in accordance with SFAS No. 141, Accounting for the Impairment or Disposal of Long-Lived Assets. In general, we determine the fair values based upon information supplied by the management of the acquired entities, which information we substantiate, and valuations using standard valuation techniques. The valuations have been based primarily on future cash flow projections for the acquired assets, discounted to present value using a risk-adjusted discount rate. These future cash flow projections are highly subjective, and changes in these projections could materially affect the amounts calculated for intangible assets. In connection with our acquisitions, we have recorded a significant amount of intangible assets. We are amortizing these assets over their expected economic lives, generally ranging from three to ten years.

Long-Lived Assets, Intangible Assets and Goodwill

We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is measured as the amount by which the carrying value of the intangible asset exceeds its fair value. Factors we consider important that could trigger an impairment review include the following:

	•	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.

We also perform an annual impairment test of goodwill at December 31. We assess potential impairment through a comparison of the fair value of each reporting unit versus its carrying value. The estimated fair value of goodwill and intangible assets is based on a number of factors including past operating results, budgets, economic projections, market trends, product development cycles and estimated future cash flows. Changes in these assumptions and estimates could cause a material effect on our financial statements.

Liquidity and Capital Resources

The following table sets forth the elements of our cash flow statement for the following periods:

	Three Months Ended March 31,

	2005			2006

Net cash provided by operating activities	$	408		$	2,066
Net cash used in investing activities		(219	)		(16,973	)
Net cash provided by (used in) financing activities		(189	)		16,130

Cash from Operating Activities

Cash provided by operations for the quarter ended March 31, 2006 totaling $2.1 million was attributable to our operating results plus non-cash depreciation and amortization expense of $966,000 as well as a $1.1 million net increase in working capital. The increase in working capital of $1.1 million was due primarily to an increase in accounts payable of $581,000 and an increase in deferred revenue of $570,000 during the quarter. For the quarter ended March 31, 2005, cash provided by operations totaled $408,000. The increase of $1.7 million in the first quarter of 2006 as compared to the first quarter of 2005 is due primarily to an increase in working capital assets as of March 31, 2006 of $1.1 million versus a decline of $724,000 in the first quarter of 2005.

Cash from Investing Activities

Cash used in investing activities totaling $17.0 million consisted primarily of business acquisitions, lease receivable payments, purchases of fixed assets and capitalization of software development costs. Total capital expenditures, including software development costs, totaled $676,000 for the quarter ended March 31, 2006. Theses expenditures primarily related to the purchase of computer equipment, computer software, software development services, furniture and fixtures, and leasehold improvements. During the first quarter of 2006, we used approximately $17.4 million to acquire the stock of Goldleaf Technologies and operating assets of P.T.C. These leases were partially offset by $993,000 in proceeds we received from payments on our direct finance leases. As compared to the first quarter of 2005, total cash used in investing activities was $219,000 consisting solely of purchases of fixed assets and capitalization of software development costs.

Cash from Financing Activities

Cash from financing activities primarily relates to borrowings (paydowns) on our credit facilities, the payment of preferred dividends, inflows from the sale of preferred stock and new debt issuances. During the first quarter of 2006, net cash provided by financing activities was $16.1 million and was attributable primarily to new borrowings of $17.1 million from our amended and restated credit facility with Bank of America, net of $355,000 in debt issuance costs. For the first quarter of 2005, cash used in financing activities totaled $189,000, consisting of debt repayments of $416,000, and preferred dividend payments of $540,000, partially offset by $400,000 of proceeds from our line of credit and $358,000 in proceeds from stock option exercises.

Analysis of Changes in Working Capital

As of March 31, 2006, we had a working capital deficit of approximately $10.7 million compared to working capital of approximately $2.2 million as of December 31, 2005. The change in working capital resulted primarily from the short-term nature of the Term B debt instrument and the current portion of our long-term debt, as well as increases in accounts payable of $1.3 million, accrued liabilities of $1.1 million and deferred revenue of $2.5 million. These increases were partially offset by increases in cash of $1.2 million and accounts receivable of $539,000. All of these changes were primarily the result of completing the Goldleaf Technologies acquisition on January 31, 2006.

We believe that the existing cash available, future operating cash flows and our amended and restated credit facility will be sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months. Furthermore, we expect to be in compliance with the financial covenants of our new credit facility throughout 2006. There can be no assurance that we will have sufficient cash flows to meet our obligations or that we will remain in compliance with the new covenants. Non-compliance with these covenants could have a material adverse effect on our operating and financial results.

Obligations and Commitments for Future Payments as of March 31, 2006

The following is a schedule of our obligations and commitments for future payments as of March 31, 2006:

			Payments Due by Period

Contractual Obligations	Total		Less Than 1 Year		1-2 Years		3-4 Years		5 Years & After

	(In thousands)
Revolving line of credit	$	1,600	$	—	$	1,600	$	—	$	—
Short-term debt		6,000		6,000		—		—		—
Capital lease obligations(1)		1,515		258		403		814		40
Long-term debt(2)		9,750		2,000		7,750		—		—
Operating leases		8,063		2,278		2,226		1,984		1,575
Note payable		1,000		850		150		—		—
Series C redeemable preferred stock		10,000		—		—		10,000		—

Total contractual cash obligations	$	37,928	$	11,386	$	12,129	$	12,798	$	1,615

Standby letters of credit commitment	$	400	$	400	$	—	$	—	$	—


(1)	In connection with our acquisition of Goldleaf Technologies on January 31, 2006, we assumed certain capital lease obligations of Goldleaf Technologies. The capital leases are primarily for computer hardware equipment in Goldleaf Technologies’ data centers.

(2)	Debt excludes non-recourse lease notes payable of approximately $5.6 million, which are non-recourse to us and are secured by the leased equipment purchased using the proceeds of the non-recourse notes.

In the future, we may acquire businesses or products that are complementary to our business, although we cannot be certain that we will make any acquisitions. The need for cash to finance additional working capital or to make acquisitions may cause us to seek additional equity or debt financing. We cannot be certain that financing will be available on terms acceptable to us or at all, or that our need for higher levels of working capital will not have a material adverse effect on our business, financial condition or results of operations.

Debt Outstanding as of March 31, 2006

As of March 31, 2006, we have debt in the amounts and as described in the following table (with dollars in thousands):

Long-term debt(1):
Secured Bank of America term loan due January 23, 2008, with installment payments due before that date	$	7,750
Revolving line of credit (Bank of America) due January 23, 2008		1,600
Capital lease obligations		1,257
Unsecured note to executive officer Paul McCulloch, for portion of signing bonus, due April 30, 2007		150
Redeemable Series C preferred stock, net of discount of $1,416		8,584

Total long-term debt			$	19,341

Short-term debt(1):
Bank of America facility term loan due July 23, 2006	$	6,000
Current portion of Secured Bank of America term loan due January 23, 2008, with installment payments due before that date		2,000
Current portion of capital lease obligations		258
Unsecured note to executive officer Paul McCulloch, for portion of signing bonus, due June 15, 2006		850

Total short-term debt			$	9,108

Total debt			$	28,449


(1)	Debt excludes non-recourse lease notes payable of approximately $5.6 million, which are non-recourse to us and are secured by the leased equipment purchased using the proceeds of the non-recourse notes.

In connection with our acquisition of Goldleaf Technologies on January 31, 2006, we assumed certain capital lease obligations of Goldleaf Technologies. The capital leases are primarily for computer hardware equipment at Goldleaf Technologies’ data centers. For a more detailed description of the capital lease obligations, please refer to note 6 of the notes to consolidated financial statements of Goldleaf Technologies, Inc. included in the financial statements in this quarterly report.

On April 5, 2006, we borrowed an additional $1.75 million under our credit facility, which increased our cash by the same amount. As of April 21, 2006, we have approximately $2.2 million of cash and cash equivalents, and we have borrowed $19.1 million under the Bank of America facility. The above description of our debt does not include the Series C preferred stock, which is classified as redeemable preferred stock because we are obligated to redeem it on December 9, 2010 for $10.0 million plus any accrued and unpaid dividends.

Historical Uses of Debt

As described below, we have used the proceeds from borrowings for several purposes since January 2004. We entered into an $11.0 million credit facility with Bank of America in January 2004 in conjunction with our sale of Series A preferred stock and common stock warrants to Lightyear for net proceeds of $16.9 million. We used the proceeds of the Bank of America facility for general corporate purposes, including working capital.

In December 2005, in connection with our acquisition of Captiva, we amended the Bank of America credit facility to convert it to a $5.0 million revolving line of credit, and we issued a $10.0 million unsecured senior subordinated note and common stock warrants to Lightyear. We paid Lightyear a fee of $250,000 in connection with this transaction and agreed to reimburse Lightyear for its legal fees up to $100,000. As of December 31, 2005, no amount was outstanding under the Bank of America credit facility. We were in compliance with all restrictive financial and non-financial covenants contained in the Bank of America credit facility throughout 2005.

On January 23, 2006, we entered into an amended and restated $18.0 million credit facility with Bank of America. We used the proceeds of the facility on January 31, 2006 to buy Goldleaf Technologies. Simultaneously with the acquisition, we also structured a signing bonus to Mr. McCulloch, then Goldleaf Technologies’ chief executive officer, to include notes totaling $1.0 million as described above.

Our Bank of America credit facility contains financial covenants, including the maintenance of financial ratios and limits on capital expenditures. We are required to maintain on a quarterly basis a ratio of Funded Debt, as defined and generally including all liabilities for borrowed money, to EBITDA. The definition of EBITDA in the credit facility agreement is different from the one used elsewhere in this quarterly report in that it permits to be added back to EBITDA various specified amounts that include employee severance expenses, non-cash debt amortization expenses, costs associated with the change of our corporate name, certain litigation expenses and non-cash stock compensation expenses. We are required to maintain on a quarterly basis a ratio of Funded Debt to EBITDA not exceeding 2:1 until the earlier of the sale of a specified subsidiary or the earlier of July 23, 2006 or the repayment of the $6,000,000 term loan that is part of the credit facility. Thereafter, we must maintain on a quarterly basis a ratio of Funded Debt to EBITDA not exceeding 1.75:1. This ratio is calculated (a) at the end of each fiscal quarter, using the results of the twelve-month period ending with that fiscal quarter and after giving pro forma effect to any acquisition made during such period and (b) on the date of any borrowing under the credit facility, using EBITDA for the most recent period and Funded Debt after giving pro forma effect to such borrowing. We are also required to maintain for the 12-calendar month period ending on the last day of each calendar quarter, a Fixed Charge Coverage Ratio (as defined) of: 1.75:1 through June 30, 2006; 1.50:1 through September 30, 2006; 1.30:1 through December 31, 2006; and 1.60:1 thereafter. In addition, we may not acquire fixed assets (other than any equipment purchased by KVI Capital with proceeds of non-recourse loans) having a value greater than $2.5 million during any 12-month period ending with each fiscal quarter. The credit agreement also contains customary negative covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock.

In connection with the January 2006 amendment and restatement of the Bank of America credit facility:

	•	The Lightyear Fund, L.P., an affiliate of Lightyear, guaranteed a $6.0 million term loan included in the facility that is due July 23, 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.

The Series C preferred stock issued to Lightyear has a mandatory redemption date of December 9, 2010 at a redemption price of $10.0 million plus accrued and unpaid dividends, and has a 10% annual dividend rate that increases to 12% on June 9, 2007.

We subsequently amended the Bank of America credit facility again in April 2006 to provide for an additional $1.75 million in short-term loans. The facility currently provides for a total of $19.75 million in loans.

Off-Balance Sheet Arrangements

As of December 31, 2005 and as of the date of this amended report, we did not have and do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment, or SFAS No. 123R. SFAS No. 123R replaces SFAS No. 123 and supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R became effective for us on January 1, 2006. SFAS No. 123R requires us to recognize in our financial statements the cost of employee services received in exchange for equity instruments awarded or liabilities incurred. We will measure compensation cost using a fair-value based method over the period that the employee provides service in exchange for the award. We anticipate using the Black-Scholes option-pricing model to determine the annual compensation cost related to share-based payments under SFAS No. 123R. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current rules. This requirement will reduce net operating cash flow and reduce net financing cash outflow by offsetting and equal amounts.

As disclosed in Note 2 to our audited consolidated financial statements included in this quarterly report, based on the current assumptions and calculations used, had we recognized compensation expense based on the fair value of awards of equity instruments, net income would have increased by approximately $71,000 for the year ended December 31, 2005. This compensation expense is the after-tax net effect of the stock-based compensation expense determined using the fair-value based method for all awards and stock-based employee compensation included previously in reported net income under APB Opinion No. 25. SFAS No. 123R will apply to all awards we grant or have granted after January 1, 2006 and to the unvested portion of our existing option awards, as well as modifications, repurchases or cancellations of our existing awards. We estimate the impact of the adoption of SFAS No. 123R for the year ending December 31, 2006, based upon the options outstanding as of March 31, 2006, to result in an increase in compensation expense of approximately $640,000. The actual effect of adopting SFAS No. 123R will depend on future awards and actual option forfeitures, which are currently unknown. The effect of future awards will vary depending on factors that include the timing, amount and valuation methods used for those awards, and our past awards are not necessarily indicative of our future awards.

Seasonality

Historically, we have generally realized lower revenues and income in the first quarter and, to a lesser extent, in the second quarter of each year. We believe that this seasonal decline in revenues is primarily due to a general slowdown in economic activity following the fourth quarter’s holiday season and, more specifically, a decrease in the amount of accounts receivable that our client financial institutions purchase. Therefore, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and that you should not rely on that comparison as an indicator of our future performance. Due to the relatively fixed nature of costs such as personnel, facilities and equipment costs, a revenue decline in a quarter will typically result in lower profitability for that quarter.

Inflation

�� We do not believe that inflation has had a material effect on our results of operations. There can be no assurance, however, that inflation will not affect our business in the future.

Part II – Other Information
Item 6. Exhibits

The exhibits described in the following Index to Exhibits are filed as part of this quarterly report on Form 10-Q.

Exhibit No.		Description

3.1	–	Amended and Restated Charter of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on No. 333-75013 Form S-1).

3.2	–	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on No. 333-75013 Form S-1).

10.1	–	Stock Purchase Agreement dated January 23, 2006 among Private Business, Inc. and the Stockholders of Goldleaf Technologies, Inc. (incorporated by reference to Exhibit 2.1 to Private Business, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2006).

10.2	–	Amended and Restated Credit Agreement dated January 23, 2006 between Private Business, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to Private Business, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2006).

10.3	–	Guaranty Side Letter dated January 23, 2006 between Private Business, Inc., The Lightyear Fund, L.P. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.2 to Private Business, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2006).

10.4	–	Exchange Agreement dated January 23, 2006 between Private Business, Inc. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.3 to Private Business, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2006).

10.5	–	Amended and Restated Warrant Agreement dated January 23, 2006 between Private Business, Inc. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.4 to Private Business, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2006).

10.6	–	Amended and Restated Warrant Certificate dated January 23, 2006 issued by Private Business, Inc. to Lightyear PBI Holdings, LLC. (incorporated by reference to Exhibit 10.5 to Private Business, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2006).

10.7	–	Amended and Restated Warrant Certificate dated January 23, 2006 issued by Private Business, Inc. to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.6 to Private Business, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2006).

10.8	–	Employment Agreement dated January 31, 2006 between Private Business, Inc. and Paul McCulloch (incorporated by reference to Exhibit 10.1 to Private Business Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 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.

Signatures

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


	Goldleaf Financial Solutions, Inc.
	(f/k/a Private Business, Inc.)
	(Registrant)


Date: March 28, 2007	By:	/s/ G. Lynn Boggs

		G. Lynn Boggs
		Chief Executive Officer


Date: March 28, 2007	By:	/s/ J. Scott Craighead

		J. Scott Craighead
		Chief Financial Officer

Goldleaf Financial Solutions Inactive 10-Q/A2006 Q1 Quarterly report (amended)